Golden Rules When Investing

 By Jason Fittler

You want to get ahead by investing shares.

But where do you start?

The first and most common approach is to look for some recommendations.

Oops! You already made your first mistake.

First Step is to Find a Broker

Brokers make their money by finding good companies to invest in and then passing on these ideas to their FEE paying clients.

Free advice is worth exactly what you paid for. Sure, if you go online, buy a paper or magazine you will find plenty of hot tips or so you think.

The facts are, brokers and fund manager do not write about their top buys. They will first build their own position before telling the public.

By the time you got the tip most of the upside is gone.

You Have a Broker

Should you just buy everything they recommend?  NO!

This is your money so you must make sure you are comfortable with the company you are buying.

Easy to Understand 

Make sure that you understand what the company you are looking to buy does. Can you identify what the company does to make money and the cost and risks associated with not just the company but also the industry it is in. 

Example: NAB is a bank, it lends out money to people and charges interest. It also charges fees for its products and services such as bank accounts, eftpos and credit cards. NAB also has a financial planning arm where it again charges fees for advice and access to products. 

If you cannot work out what a company sells or does to make money, it is best to avoid.

Capital Requirements

Some companies are highly capital intensive. Meaning that most of the profits get reinvested back into the company. 

This puts a strain on the company’s cash flow and dividends. Low capital-intensive companies usually have a stronger cash flow and lower risk level.

Barriers to Entry

The harder it is for a new competitor to gain access to the company's client base the stronger the company. Usually the higher the initial upfront cost the higher the barrier to entry, a good example are toll roads. The cost of someone else building another road beside it costs way more than the benefit they will receive.

Government Involvement

Any company, which relies heavily on the government for income or government legislation, is a higher risk company.

If the government is the main client then the company is at risk of change in policy.

Companies need a diverse client base.

If government legislation restricts the company it will decrease its competitiveness. It will also increase the risk of the company.


Always take a quick look at the management of a company. The company website should give you the details.

You are looking to make sure that the management has the relevant experience in the area that the company works.

Are they focused on the company or their own pay cheques?

Like to know more? Give us a call (07) 4771 4577.


Intrinsic Value

By Jason Fittler

Intrinsic value is important in the current market.

Why? It is the true value of the business you are looking to buy.

The GFC was caused because companies traded above their intrinsic value, investors and advisors lost prospective and started to trade the trend. The market will always correct itself back to intrinsic value.  In Bull markets it will trade above and in Bear it will trade below.

A definition of intrinsic value is below;

In valuing equity, securities analysts may use fundamental analysis — as opposed to technical analysis — to estimate the intrinsic value of a company. Here the "intrinsic" characteristic considered is the expected cash flow production of the company in question. Intrinsic value is therefore defined to be the present value of all expected future net cash flows to the company; it is calculated via discounted cash flow valuation.

An alternative, though related approach, is to view intrinsic value as the value of a business' ongoing operations, as opposed to its accounting based book value, or break-up value. Warren Buffett is known for his ability to calculate the intrinsic value of a business, and then buy that business when its price is at a discount to its intrinsic value.

In the current market many companies are trading below their intrinsic value, our focus is to identify these companies and bring them to your attention.

Sometimes the market favors the short term investor but right now the market favors the long term investor, the investor who can look past the short term trends and focus on buying quality business at a discount. To be a successful investor right now you need to focus on the long term, buy businesses which are undervalued and hold for income and long term growth.

Look at it this way, if you see a TV for sale at half its retail price, you buy it and go home with a bargain and feel comfortable with your purchase. The same is happening right now with shares. You can buy quality business at deep discounts.

Intrinsic value is the real value of an asset you just need to be able to look through all of the short term noise and take a long term prospective on investing and you will be way ahead of the pack.

Only the few will rise to the top, make sure you are one of them.

For more information please call me on (07) 4771 4577.

Income and What it Means to a Share Portfolio

By Jason Fittler

Often when we talk about the share market and large companies such as BHP, WOW or CBA investors have a hard time comprehending how these companies work.

True their structure, financing arrangements and business models are very complicated. The average person has little understanding of how they work and what to look for when investing.

But one indicator holds true for all businesses whether they are large multi-national companies or the small one man business - cash flow.

The cash flow of a business is the life line of that business. Simply put if the company generates enough cash flow to cover its expenses it will make a profit.

If it can do this consistently then it is a quality business.

If the company has to borrow to meet cash flow demands then the risk of this company is higher

If you then combine this indicator with another, dividends per share, you will quite simply get a very good idea of how this company is performing.

Dividend per share is the amount of surplus cash not required by the business and as such paid out to the shareholders as return.

Again with dividend per share there are a couple of traps to look out for. First, that they are not borrowing to pay the dividend. This should be detailed in the cash flow, and second dividend reinvestment, are the extra shares simply issued by the company or purchased on market. Companies which issue more shares to pay dividends are in affect borrowing to pay the dividends and as such carry more risk.

If you apply these two indicators and find a company which has a sufficient cash flow to pay dividends and the dividend yield is above the cash rate then long term this will be a quality company and you can expect to see long term growth in this stock.

In a market such as we have now, income and cash flow are the keys to successful investing.

Choosing companies which meet the above criteria will provide you a return above the bank bill rate and long term growth.

The above provides you with the tools to prepare a back of the envelope calculation to quickly measure up if a company is worth investing in or not.

Do you have any questions on the above?

Please give me a call I am happy to discuss.  Call (07) 4771 4577.

Greenshoe, What You Need to Know.

By Jason Fittler

No this article is not about women’s fashion, it is about deception in the stock market.

Greenshoe is more formally know as the over-allotment mechanism.

This is used to provide after market support for a new float.

It was last used in the 2006 Telstra float and now looks to have the green light for the QR National float.

How it works.

First the ASIC has to approve the scheme, not every new float is allowed to do this.

Once approved the float managers (such as Credit Suisse, Goldman Sachs, Merrill Lynch, RBS and UBS) are able to sell 15% more shares than they are allotted by the company being floated. This effectively means they will sell more shares through the float to their clients than they have to sell.

Once the company floats, the float managers will then buy back the excess shares through the market, they only do this if the price is below the issue price of the float. This allows the company being floated to artificially hold up the price of the stock in the after market.

Although legal, I frown on this sort of behaviour. If a company is priced right, there is no need to support the stock in the after market. Doing so indicates to me that the stock is over priced in the float.

Corporate Capital Allocation

By Matthew R Smith (B.Com C.Dec)

I am an owner who takes a very big interest in the companies I own a part of.

What I am about to propose is heresy to legions of income-hungry, dividend fans.

Firstly, what I am not saying is that all companies should retain 100% of their earnings. Funnily enough, there are some companies which should not retain 1 cent of their earnings. Those businesses, the ones with low rates of return on equity (ROE) should in fact distribute all earnings to their owners. However, there are companies that should suspend their dividends and retain all their earnings. My reasons follow.

With the removal of the double taxation and implementation of the imputation system, Australian investors have been lapping up these franked dividends since 1987. This silent protest from Australian investors has been so effective that corporate capital allocation now blindingly follows the mantra to the significant cost of the very investors the mantra seeks to serve.

Business owners will be financially significantly better off if, a company stops paying a dividend and can re-invest earnings at a higher rate of return than owners can elsewhere.

Australian directors which are generally part owners are selling themselves and their other business partners short by paying a dividend at present. The following example demonstrates my rational allocation of corporate capital.

Take a company with $10 per share of book value on its balance sheet. Assuming a return on equity of 20% per annum and assume 50% of earnings are paid out as a dividend, as often is the case in Australia. In the first year, earnings per share will be $2 and the dividend will be $1. The retained $1, which is not paid out as a dividend, increases the equity at the end of the year to $11. In year two the company generates a 20% return on equity, this time on $11 per share of book value, producing $2.20 of earnings.

If we now assume the market chooses to never re-rate this stock from a price/earnings multiple or P/E of 10, you will find that in year one the stock price will equal $20 (P/E of 10 x $2 of earnings). In year two, the share price will be $22 (P/E of 10 x $2.20 of earnings).

In year one, you will receive a $1 dividend, and in year two a capital gain of $2 for a total return of 15% ($1 div + $2 gain = $3 / $20 share price = 15%) but had the dividend not been paid, retained earnings would have been $2 and the beginning equity in year two would have been $12.

A 20% ROE, on the newer higher equity of $12 would correspond to earnings per share of $2.40 in year two. If the P/E remains at 10 times earnings the share price would be trading at $24. The owners would have received a 20% return ($0 div + $4 gain = $4 / $20 share price = 20%).

By following the mantra that seeks to serve, the owners have robbed themselves of $2 in capital gains.

For many years, it has been investment hoodoo-guru that as you attain a senior’s card, your portfolio should lean increasingly towards income and clear itself of growth. Unfortunately, the majority of Australian companies irrespective of their returns on equity have been obliged to adhere to the irrationality of flawed financial advice for far too long.

I simply wish to see that business owners don’t miss out as a result and see that dividends are suspended until the Return on Equity equals a company’s weighted average cost of capital.

Kind regards,

Matthew R Smith (B.Com C.Dec)
Private Client Adviser | Authorised Representative: 327 246
RBS Morgans Limited | ABN 49 010 669 726 | AFSL 235410
Unit 3 69 Eyre Street North Ward QLD 4810
PO Box 1663 Townsville QLD 4810
Direct: 07 4771 4577
Email: [email protected]
Level 1 Candidate for the CFA Program

A Double Back Flip With Reverse Pike, RSPT or MRRT.

By Jason Fittler

Our view has consistently been that some form of compromise on the proposed mining tax would be reached and the market had over-reacted in quickly pricing in the worst scenario.

The revised Mineral Resource Rent Tax (MRRT) and Petroleum Resource Rent Tax (PRRT) is clearly a good outcome for the miners and QLD LNG players respectively. It brings the new tax impost to a more competitive level globally. Clear winners are BHP, RIO, FMG, ERA, STO and ORG.

New mineral tax (effectively an iron ore and coal tax) only applies to coal and iron ore, with base and precious metal operations now excluded.

The Petroleum Resource Rent Tax (PRRT) will now apply to all onshore and offshore operations (including the North West Shelf). The MRRT rate was lowered to 30%, compared to the RSPT at 40%. However once the impact of the 25% ‘extraction allowance’ is applied, the tax reduces to 22.5%. Overall, the maximum effective tax rate now drops from 57% under the RSPT to 45% under the MRRT, before allowable deductions, on our analysis.

The Winners and Losers

The biggest "valuation" beneficiaries relative to possible impacts under the now defunct RSPT are the diversified miners (BHP and RIO) and Aussie focussed iron ore, base metal and uranium producers. Primarily because these were the most impacted by the RSPT.

In the oil and gas space the QLD CSG/LNG developers will be beneficiaries, specifically Santos and Origin. As the North West Shelf is now being taxed also under the PRRT, Woodside stands to lose around 2% to its NPV.

Re-rating is likely to take longer than the de-rating, so use the time to reposition. Uncertainty is typically factored into the market very quickly, whereas the removal of uncertainty is usually met with a little more caution.

The de-rating of Australian resource companies around the RSPT announcement in May appeared to cause some fairly significant Australian market selling by international funds. It is likely that the revised resource tax will attract international investment back to the Australian market but at a slower pace than the sell down given ongoing global economic concerns.

Hence, a re-rating of value lost will typically take a little longer to return. Cash inflows will most likely be directed toward larger more liquid stocks, at least initially.

We recommend investors use this window of opportunity to reposition themselves and ‘get set’ in stocks such as BHP, RIO, FMG and ORG.

Self Funded Installment Warrants

By Jason Fittler

Over the past couple of weeks we have seen the market rally, this has for many of us seen good gains in our portfolios. But how do we…

1. Maintain our level of exposure to our current stocks?
2. Extract money to invest in further stocks?
3. Avoid margin calls or borrowing against our house?
4. Still receive the full dividend entitlement?

A Bear market provides great opportunity to buy into undervalued stocks which will in the long term provide great capital gains.

Over the past week I have been using Self Funding Installment Warrants to achieve all of the above, this has provided me with the cash I will need to buy bargains when they become available.

If you would like to learn more give me a call on 07 4771 4577.

2009 Financial Year

By Jason Fittler

Last financial year will not be forgotten quickly.

Let’s take a few moments to review how we performed overall.

On a global scale we were the sixth worst performing market with a overall drop of 24%, the worst hit was France with a drop of 28% and the best performing was India with growth of 9.7%.

Interest rates fell from 7% back to 3%, the worst performing sector was the materials sectors which lost 35% over the year, the best performance was information technology up 1%.

The aussie dollar closed lower at 80c but did recover from its mid year lows of 65c, however it did out perform most of the major world currencies.

Oil prices fell 49% closing around $70 US a barrel, copper closed down 40% while gold held up closing around $950 a ounce, about where it started the year at.

For Australia it was indeed the worst year in the last 27 and certainly ranks as one of the three worst Bear markets in our history.

Let's look at the best and worst performing stocks.

In the ASX 20 the best performer was Woolworths up 7.8% for the year with Fortescue Metals being the worst at a loss of 68%.

In the ASX 50 the best performer was Lion Nathan up 35.3% for the year with BlueScope Steel being the worst at a loss of 72%.

In the ASX 100 the best performer was Karoon Gas up 100% for the year with B&B Infrastructure being the worst at a loss of 90%.

The take away from this is, the best performing stocks in 2010 will come out of the worst performing stocks 2009.

There are a lot of good companies out there which have been sold down over the past 18 months and will in the near future recover to show extra ordinary gains.

The next couple of years will be a stock pickers market; there will be plenty of opportunity. I do not advocate a return to being bullish but certainly now is the time to start buying with a long term view.

There will be a lot of millionaires made over the coming year, although you may not realise it for 2-3 years.

Now the good news!

2010 will not be a bad as 2009, here is why, the government acted quickly, pumping money into the economy. This action will get the machine working again, due to the quick response, a lesson they learnt from the Great Depression as such the recover will be shorter.

On average it will take the market between 12-20 months from when the market bottoms to recover in a bear market. If you believe, as I do, that March 2009 was the bottom then this would indicate that the market will have recovered by December 2010. Not long in investing terms.

If you are thinking of waiting until December 2010 to start investing, you will be to late. Act now.

Like to know more? Give us a call 07 4771 4577.

Share Purchase Plans and Rights Issues

By Jason Fittler

Companies can raise money many different ways;
they have access to traditional methods like us, which is borrowing from banks. They can also borrow from investors like us through the use of preference shares, convertible notes and bonds. But one of the best ways that they can raise money is through the use of Share Purchase Plans or Rights Issues.

So how do these work?

Share Purchase Plan (SPP) – through a SPP a company will offer share holders more shares in the company at a price which is discounted to the current price. To do this the company will simply issue more shares. Typically the company will allow any shareholder to bid for between $2500 to $15,000 worth of shares. How much you apply for is up to each individual share holder. Under a SPP, you can be scaled back, meaning you get less shares then you initially applied.

Rights Issue – under a rights issue the company will allow you to purchase some many shares for each share you hold at a price discounted to the current market price. As this is a right you are not subject to a scale back, nor are you under any obligation to take up the shares. For example you may be entitled 1 for every 2 shares you hold in XYZ at a price of $5 per share. As such if you hold 100 shares in XYZ you are able to buy a further 50 shares at $5 per share.

Companies will undertake a right issue or SPP to raise capital for one of many activities including, paying out bank loans, purchase of assets or to recapitalise the company.

You need to be aware that if a company you hold stocks in is under taking a rights issue or SPP your holding will be diluted. As more share will be issued in the company so some action should be taken. As the shares are normally offered at a good discount to market price you have the option to take up the shares or sell some exiting shares and use the cash to take up the offer and pocket the surplus cash.

The important thing to note is that you need to take some sort of action,
no action will mean that you will lose money.

Like to know more? Give us a call 07 4771 4577.

Selling a Covered Call Option

By Jason Fittler

Selling a Call option is an income strategy.

It suits investors who have large holding of blue chip stocks. If you hold over 1000 shares in a large blue chip company and you are looking for more income this strategy is for you.

If you do not hold the shares then this would be a high risk strategy as such I would not recommend it.

Selling a Call option means that you give someone the right to buy your shares at a set price. For this right you receive a payment.

Example. You hold 1000 shares in XYZ, the share price is $10 and you do not expect to see the price move up from here in the short term (30 Days). To earn a little more income you sell a $10 call over XYZ for this you receive $0.50 per share or $1000.

Your risk is that the price of XYZ moves higher, if this is the case you lose any up side in the share price above $10.50. The $10.50 is made up of the $0.50 you received for the call and the $10 you would receive on being exercised on the Call and having to sell your shares.

The up side is if the share price stays below $10 you will keep the $0.50 you received for the sell Call - giving you a return of 5% for the month. This process can then be repeated as often as possible throughout the year.

Through selling Calls you are able to boost the overall return for your portfolio and make your shares work harder for you.

Keep in mind when selling Calls you must have the right conditions to place the trade, be patient and pick the timing. It is best to have a professional do this for you.

If you are interested in this sort of opportunity give us a call 07 4771 4577.

Why Buy a Put Option?

Put options are a fantastic way to insure your portfolio.

By Jason Fittler

Buying an option is buying the right to take some sort of action. You use them in the share market to increase leverage and reduce risk.

A Put option gives you the right to sell a share at a certain price, by a certain time. This allows you to outlay a small amount of money now but at the same time provide you with the benefit of locking in the price you can sell your share. Your risk is the cost of the option.

Example: You want to hold your existing holding of 1000 shares in XYZ. Current price is $10. But you are concerned that the price of the stock may fall. To lock in the current price of XYZ now and make sure that you are protected from any fall in the price of XYZ, you purchase the right to sell XYZ for $10 in six months using a Put option; this costs you $1 per option or $1000.

Investors do this for a number of reasons, to protect their portfolio from downside risk if they think the market is falling, to reduce transaction costs, to prevent incurring capital gains or to speculate on the market.

If after 6 months the value of XYZ has fallen to $5.00 per share, the price of your Put option will now be worth $6.00 per option. When you entered the Put position your shares were worth $10,000 and your Put cost you $1000. Your total investment was $11,000. Six months later the shares are worth $5,000 and the Put is worth $6,000, so value is still $11,000.

As you can see from the above example you have had a zero sum gain, you have protected your position against a fall in the price of XYZ. If you did nothing, you would have lost $5000 on the shares. So in essence, by buying a Put option you can insure your portfolio against falls in the price.

What would also be apparent to some of you is that you could use Put options to speculate on downward movements in the market. Indeed many traders do. But keep in mind, with options you have to get the direction of the market correct as well as the time in which this will happen. As there are two factors affecting your return, the risk of trading options is higher and therefore should be done with the help of professionals.


With options you need to get two things right, the movement of the shares, with a Call option the price of the share needs to move up. Second you also need to get the timing right, in the above example you have 6 months for the stock to move up. Longer then this and you lose the value of the option.

Leverage, when you gear you get better returns and bigger losses.

In the above example, if you purchased $10,000 worth of Call options in XYZ and the price moved down 10% you would lose all of your money. If you purchased the shares you would lose $1000.

To know more give us a call on (07) 4771 4577.

Why Buy Call Options

By Jason Fittler

Buying an option is buying the right to take some sort of action. You use them in the share market to increase leverage and reduce risk.

A Call option gives you the right to purchase a share at a certain price, by a certain time. This allows you to outlay a small amount of money now, but at the same time provide you with the benefit of any up side in the share. Your risk is the cost of the option.

Example: You want to buy 1000 shares in XYZ, current price is $10. But, you only have $1000. However, In 6 months time due to sale of other assets you will have $10,000. To lock in XYZ now and make sure that you benefit from any increase in the movement of the share over the next 6 months, you purchase the right to buy XYZ for $10 in six months using a Call option, this costs you $1 per option or $1000.

Once you have the $10,000 to hand you simply exercise your option and buy the shares for $10 each. The total cost of the shares is $10 plus the $1 call option total $11. As long as the share price for XYZ is above $11 you are in front.

If during the 6 months the price of XYZ falls to $5, then you simply walk away from the option losing your initial cost of $1 per option. This allows you to limit you losses to the amount of the options.

It is clear from the above example that you can also use these options to speculate on the market. If you buy options rather then shares you have better leverage and as such larger returns.

Take the above example; instead of buying $10,000 worth of shares in XYZ, you could purchase $10,000 of Call Options in XYZ effectively having exposure to 10,000 shares. If the price of XYZ moves up 10% the holder of the 1000 shares makes $1000. While the holder of $10,000 worth if XYZ options makes $10,000 dollars. You can see the attraction.


With options you need to get two things right, the movement of the shares (with a Call option the price of the share need to move up). Second you also need to get the timing right. In the above example you have 6 months for the stock to move up. Longer then this and you lose the value of the option.

Leverage… When you gear, you get better returns and bigger losses.

In the above example if you purchases $10,000 worth of Call options in XYZ and the price moved down 10% you would lose all of your money. If you purchased the shares you would lose $1000.

To know more give us a call on (07) 4771 4577.

Listed Investment Companies (LIC) – What Are they?

By Jason Fittler

Normally when we speak about investing in the share market we all think about buying individual shares, the likes of BHP, ANZ, Woolworths etc come to mind.

The truth is that there are many ways to invest into the share market, one of my favorites is through a LIC. But what is it?

A LIC is a company which invests in shares, much the same as managed funds, the core differences are;

1. A LIC is a company where as a Managed Fund is a trust.
2. A LIC normally pays out all the income earned while a Managed Fund will only pay part.
3. A LIC is listed on the stock exchange, so they are cheap and simple to get into and out of. Where as a managed fund is not.

There are many LIC’s listed on the share market, each of which will offer you a different investment experience. The benefits of a LIC over ordinary shares are;

1. Diversification, you have exposure to a number of different shares by purchasing just one. This is great when you do not have a lot of money to invest.
2. International Exposure – some LIC invest directly in International shares, this allows you to obtain exposure to international shares at a low cost.
3. Discounts – in poor markets LIC’s can trade at a discount to their net assets. Keeping in mind that the assets are shares, this means that are effectively buying the shares cheaper through the LIC than you can by buying them on market.
4. Premiums – at times the LIC will trade at a premium to the net assets, which means that you can sell the shares for more through the LIC than you could on market. Giving you a better return than holding the share direct.

LIC’s are good long term investments and in a Bear market are good buying, if you only have a small amount to invest or want a hassle free share portfolio then a LIC could be for you.

PS. Need more information on LIC? Give us a call at ABN AMRO Morgans Townsville, 07 4771 4577 we are always ready to listen, explain and help.

IPO’s - How You Get Involved.

Initial Public Offerings are also known as IPO’s or floats.

By Jason Fittler

An IPO is when a company goes to the market to raise money. They do this for a number of different reasons including to fund expansion or sell part of their company. This is your chance to get in on the ground floor as normally once the company lists on market the price will rise.

Getting in on the initial float is the best way to maximize your profits; this is due to the promoters offering the shares below fair value to provide an incentive for investors to buy. The question is how do you get in on the ground floor?

Simple, be a preferred client of a broker who deals in floats. Any good float is always heavily over subscribed, the only way to ensure that you get some, is to be allocated firm stock from your broker. Brokers will only hand out this stock to their best clients, this is how they reward their clients for the loyalty shown over many years.


1. If you do not have a close relationship with a broker and they call you and offer you stock, be careful as demand for the stock is most likely low and the price might drop on open.

2. If you get stock through a discount broker, see above.

3. Not all IPO’s are good ones, in the last year of the Bull market over 90% of the IPO opened below the issue price. A good broker will avoid these IPO for you.

Right now is a great time to be involved in IPO’s, during a Bear market brokers know that only the good IPO’s will be taken up as such they will only float the best companies.

Over the next couple of years we will see some fantastic IPO’s come to the market place.

Now is the time to make sure your broker is thinking of you.

PS. Need more information on IPO's? Give us a call at ABN AMRO Morgans Townsville, 07 4771 4577 we are always ready to listen, explain and help.


By Jason Fittler

Click here to hear the audio of this article.

Gearing... we all know what this is, but only few truly understand. It’s simple, the higher the gear you use in your car the faster it goes, while the motor is working at the same rate.

The same is true for your investments; by borrowing to invest you get to where you want to go quicker. However, much like a speeding car there are risks involved.

In the 1972 Oil Shock, 1997 Asia Crisis, 2000 Tec Wreck, 2001 911 and now in the 2008 Credit Crisis all investors have become acutely aware of these risks. Today’s Credit Crisis is by far the worst of all of these; this is due to the oversupply of credit coupled with a strong 5 years Bull Market. People took the risk, many being so badly burnt that they will never return to the market.

The fact is that now is the best time to be gearing up as the market is low and interest rates are falling. These two factors have set the stage for a fantastic return over the coming 5 years. But there are some issues to consider; how you gear, your income and safety.

Today I want to discuss Self Funding Installment Warrants.

A warrant is a financial instrument issued by banks and other institutions and traded on ASX. Warrants provide investors an alternative way to gain exposure to a variety of underlying assets, such as shares, to achieve a desired result.

There are different types of warrants which can suit investment purposes. Warrants with an investment purpose, such as instalments, are generally longer-dated, tend to be less frequently traded and have a lower risk/return profile. While warrants with a trading purpose, such as trading warrants are shorter-dated, traded frequently and have a higher risk/return profile.  

The main reasons why you would invest in warrants are:
1.    Achieve a leveraged exposure to an underlying share, such as BHP Billiton
2.    Diversify your exposure to the share market
3.    Generate an income stream through dividends and franking credits
4.    Protect the value of your share portfolio
5.    Limit your downside risk.
6.    No margin calls.
7.    Interest deductions available.

Each warrant has a set of features that defines its characteristics.  These features are non standardised, varying between warrant types, and are tailored to meet the needs of different types of investors. Some of the features offered by warrants are:

1.    entitlement to the full dividends and franking credits paid on the underlying share
2.    ability to pay a portion of a share's value upfront without the obligation to repay the balance
3.    Capital guarantees over the issue price of the warrant.

Self-Funding Instalments are a cross between a regular instalment and an endowment. You pay approximately 50% of the share price and the issuer loans you the remaining amount plus interest and borrowing. They run normally around 10 years at the end of the term you may have a small amount to pay and then you will own the underlying share.

In contrast to ordinary instalments, the dividends from the underlying share are retained by the issuer and used to reduce the loan balance of a self funding instalment. You are still entitled to franking credits, which may reduce your tax liability – this is particularly important for Self Managed Super Funds.

At annual intervals until expiry, the issuer will charge a further twelve months of prepaid interest to the loan, increasing the loan amount (generally on 30 June). The objective is to achieve a positively geared investment where the dividends outstrip the interest charged, paying off the loan as time passes.

Depending upon your circumstances, you may be entitled to a tax deduction for the interest cost. At any point in time before expiry you may sell the instalment on ASX. While the interest is prepaid for 12 months the borrowing fee is prepaid to expiry (usually five years).

The below two web sites provide you with some more information on warrants, both of these web sites are designed for education purposes. Simply click on the links and listen to the presentations on warrants.

Why should you look at these investments?

1.    Safe gearing – your down side is limited unlike a margin loan.
2.    You still receive the franking credit for tax.
3.    They run for 10 years, at the end of this time you will own the underlying share. Much like lay by.
4.    You can use these in your Self Managed Super Fund.
5.    If you roll your existing shares into Self Funded Warrants, you will receive cash which can be used to pay out your existing margin loan. As such reducing the risk of your portfolio.

For more information contact me on 07 4771 4577.

Until next week.

Short Selling – What Does it Mean?

Everyone is talking about it… No one knows what it is.

Short selling or "shorting" is the practice of selling a financial instrument the seller does not own, in the hope of repurchasing it later at a lower price. This is done in an attempt to profit from an expected decline in price of a security, such as a stock or a bond.

Often the seller will "borrow" or "rent" the items to be sold, and later repurchase identical items for return to the lender. However, the practice is risky in that prices may rise indefinitely, even beyond the net worth of the short seller. The act of repurchasing is known as "closing" a position.

The term "short selling" or "being short" is often also used as a blanket term for strategies that allow an investor to gain from the decline in price of a security. Those strategies include buying options known as “puts”. A put option consists of the right to sell an asset at a given price; thus the owner of the option benefits when the market price of the asset falls. Similarly, a short position in a futures contract means the holder of the position has an obligation to sell the underlying asset at a later date, to close out the position.

The problem in this market with the introduction of leveraged products such as margin loans, options, warrants and contracts for difference, is that investors are now able to enter into highly leveraged short positions. This causes market volatility as investors look to close out these highly leveraged positions and to some extent can distort market movements.

Most investors will never look to short the market, in fact most investors are long the market, that is, they buy stocks and hold them for the long term. Shorting has traditionally been a tool of the professional investor or broker and is a tool they used to insure positions.

Why Many People Think Shares Are High Risk

Many people liken investing in shares to betting on horse racing or going to the casino. Why?

Here is a typical example of a first-time investor:
Without any experience, professional advice, or education, they purchase shares. They then lose all of their money. Based on the experience, they conclude shares are a high-risk investment. Badly burnt once, they never again enter into the share market.

Let's take a closer look at this typical share trading experience.

It normally begins with a hot tip from a friend, family member, media article or a taxi driver. The person who gives the tip has already invested and is going to make a fortune.

The first-time investor does some research. They ask friends and family members their thoughts. These people more than likely have the same advice from the same person. What a great idea, we’ll all be rich. The first-time investor visits the company’s web site to see what they have to say. Surprise, the company’s web site is very positive on the stock.

To save money, the first-time investor goes along to a discount broker and places the trade.

A slightly more educated first-time investor may decide to pay a little extra and call a stockbroker to get their opinion and place the trade. The stockbroker most likely has never heard of the stock and recommends against the buy, explaining that it is high risk. But this is all too late, the investor has it in their head that this is easy money and pushes ahead regardless of the advice given.

The stock fails and the company goes broke. The first-time investor loses all their money. Badly burnt the first-time investor concludes that the share market is a high-risk game. And stockbrokers don’t know anything or add any value.

The Lesson: If you have little or no stock market experience seek out and listen to independent professional advice, before you start betting the farm on a hot tip. If you do you'll find the stock market is no more risky than any other form of investing. But you must understand how it works, you must be educated. Reading through our Grow Your Wealth archive section is a great place to start.

When you need advice, we are always ready to listen and help. Give us a call (07) 4771 4577.

PS. If this story sounds familiar, try investing again, but this time, seek out advice. Avoiding shares due to one bad experience will cost you more money long-term then you lost the first time.

Why Serious Investors Should Look at Option Strategies

First, what Options are not: Options are not a form of betting. Options are not about trading on a computer program purchased for $10,000. Options are not about investing all your capital in each trade. Anyone who approaches options with this attitude will lose their shirt.

Serious and professional investors use options as a form of insurance, and to provide extra income for their portfolio.

Why should you start to think about options? I believe the market is cheap at present. And I fully expect to see the market move back towards 6300 over the coming 12 months. Second, I believe that the market will trade sideways from 6300 for a number of years after that. Keep in mind that even when the market moves sideways there will still be spikes and dips.

Below I will discuss two simple strategies. The first is an actual strategy I did last week. The second is a strategy you could use right now. Both have very different reasons as to why you would do them.

Sell a Call
You would look to use this strategy if you think that the price of a stock you hold (in this case BHP) has topped and is likely to fall. However, you do not wish to sell due to the capital gains tax issues.

In my example I sold a $42 call, this means that I have given someone the right to buy 1000 of my BHP shares at $42 and for this they have paid me $2,350.00. At the time I sold this call, the price of BHP was $42. As such, if I have to sell my 1000 shares I will receive $42,000 plus the $2350, giving me a total of $44.35 per share. Overall, I would be happy with that price.

One of two things can happen.
1. The price of BHP continues to move up and I end up selling my shares for $44.35 and lose any upside beyond this.
2. The price of BHP moves down, this is in fact what happened. BHP moved back to $37.00 per share. Therefore, my shares that were worth $42,000 are now worth $37,000 a loss of $5000.00. However, I also made $2350 from the sale of the call reducing my loss to $2650.

Overall, a good result. Keep in mind that I have a low cost base on the share and had I sold the shares on market at $42 and then purchased them back at $37 although I would have saved $5000, but it would have cost me more than this in capital gains tax and transaction fees.

Selling a call is used to protect your portfolio from any downside movements
in the price of your share and improve the income of your portfolio.

Sell a Put
You would look to use this strategy if you think that the price of a stock is cheap right now and you would be happy to buy at the current price but would like to try to get it a little cheaper.

Let us look at a live example, which you could have done last Friday.

I would look to sell a $10.65 Put over Suncorp. This means that I have given someone the right to sell my 1000 shares in Suncorp at $10.65 per share, and for this they have paid me 0.44c per share. At the time I sold this Put the price of Suncorp was $10.70 per share. If I have to buy the 1000 shares in Suncorp it will cost me $10,650, less the $440 I was paid when I sold the Put. This brings the overall price of the Suncorp shares down to $10.21 per share ($10.65 less 0.44c). Overall, I would be happy to buy 1000 shares at the current price of $10.70 so I would be more than happy buying them at $10.21.

One of two things can happen.
1. The price of Suncorp continues to go down and I end up buying the shares for $10.65. Keep in mind that I have already been paid the 0.44 cents, so my actual cost was $10.21. The risk with this strategy is that Suncorp goes broke and the shares are worthless. This is why we only do this strategy over a stock, which is very unlikely to go broke, such as Suncorp.
2. The price of Suncorp moves up. In this case, we do not buy the shares in Suncorp and as such, we miss any upside in the share price. However, for our troubles we end up with $440 in our pocket.

As you can see in both of these strategies you could miss out on future upside in the shares price, but please keep in mind that we are employing this strategy at a time when the market will be moving sideways. There will be other opportunities to get into the stock later.

Do these strategies interest you?

Give us a call and we can discuss it further. Ph: 07 4771 4577.

PS. Please be aware Options are not for everyone. We do put you through a screening process before we will advise or perform any trades on your behalf.

Ten Traps of the Bear Market

1. Throwing in the Towel – after a prolonged Bear market it gets all too hard for some investors. As such investors simply sell out never to return. This is the worst possible outcome. Keep in mind it will always get hard before the good times, otherwise there would not be good times.

2. Portfolio Rage – this is where you blame everyone else for the state of your portfolio. Remember, in a good market anyone can make good calls; it is in a bad market that your adviser earns his money.

3. False hope – when you see a $20 stock fall to $10, common sense will tell you that if it was good value at $20 then it is great value at $10. This is not always the case. The share may no longer be the same beast it was previously. Be careful when buying in a bear market, there is good value out there but not everything will turn to gold.

4. Weed the garden – do not fall into the trap of holding a stock which has fallen, a weed is a weed, pull it out and move on. At the same time do not sell good stocks, hold these as they are more likely to rebound with the market.

5. Suckers rally – the market can move sideways in a Bear, but on its sideways track it can tend to spike and dip. Do not be fooled by any spikes, these are most likely sucker rallies. Bear markets can last as long at 3 years.

6. The slow analysis’s – in a Bull market analysis’s are quick to increase their numbers on the back of good news; however, in a Bear market they are slow to down grade. Be careful of looking only at a companies PE ratio to determine if the company is cheap. A slow moving analysis’s may not have upgraded their numbers, as such the PE could be giving the wrong signal.

7. High dividends – it is common in Bear markets that companies cut dividends, do not look at the historical data. Take a look at the projected dividends before buying that high yielding stock.

8. Media madness – Media sell advertising space not information. The media love a good story and if they can not find one the next best thing is to make it up. Make sure you do your own independent research not just read a paper. Remember the old saying “Pay a dollar and you will get a dollar’s worth of information”.

9. Picking the bottom
– nobody rings a bell at the bottom of the market to let you know. Trying to pick the bottom is a mugs game a savvy investor knows this, so they invest with a long term view buying quality stocks which are cheap. This way they do not miss the first 10-20% of the Bull market.

10. Quick recovery – losing money hurts and a Bear market can go for a number of years. Waiting for a quick rally will only leave you with broken dreams. Beware that there will be plenty of thrills and spills in the Bear market keep working through it and you will come out on the other side a better and richer investor.

We are always available to answer your questions.

So make sure you call us, before investing. Phone (07) 4771 4577

Jason Fittler

Margin Lending – What is Your Exposure?

By Jason Fittler

Do you have a margin loan? Have you heard of Tricom, OPES Prime or Chimaera Capital Ltd?  Me neither. But now they are becoming house hold names, for all the wrong reasons. These are stock broking / margin loan companies who have had been in the media with regards to concerns over there ability to keep their doors open. With the risk that there clients may lose the money which they have invested with them.

It is one thing to invest in an underperforming company it is another one to lose money because you chose the wrong stock broking firm.
The purpose of the article is to do two things;
1. Make you take a closer look at who is looking after your money and
2. Have a think about how you have your lending structured.

First, we all speak about investment risk… that is the risk that one of your investments may under perform. To reduce this risk we generally diversify our portfolio. However, this is not practical when choosing a financial adviser. As such you need to make sure that you make the right decision from the start. I recommend that it is better to be a big client of one adviser then a small client of many. Why? As a big client you will get better service, better advice and better results.

You also want to make sure that your adviser has all of the right qualifications and has the backing and support of a well know dealer group. Before signing make sure that you read all documents. A good adviser will disclose all information up front as they have nothing to hide. Keep in mind the general rule, if the deal seems too good to be true it most likely is.

Second, we are heading into time of higher interest rates and lower returns from the market. As such you need to start think about how much gearing you have and how this impacts on the over all return of your portfolio. I do not recommend getting rid of all of your borrowings but I strong recommend that if you are highly geared, that is above 50% of what you have invested comes from borrowed money, I would look to reduce this down to around 30%. Also take a look at who is your margin lender and make sure that the shares are held in your name and not in the name of a custodial trustee.

A custodial trustee can use these shares to secure borrowings, this is what has happened in the OPES Prime case, in this situation your share can be sold to pay out the custodial trustees loan leaving you to try and recover your funds from the custodial trustee. This is a structure you should never have.

If you would like us to review your situation give us a call on 07 4771 4577.