Investor Psychology

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 Investor Psychology Powered By Docstoc
					     Living with the Bear Market
                  and
  Preparing for the Next Bull Market

                            ASX Investor Hour
                            Melbourne 1 October 2008



Copyright Colin Nicholson          www.bwts.com.au     colin@bwts.com.au
                            Warning
          The views expressed in this presentation are
          intended only for discussion and education.

       They are not intended to be, nor are they suitable
           to be, acted upon as investment advice.

       It is advisable to obtain investment advice from a
        licensed adviser before making any investment
               decisions based on my presentation.

               I am not a licensed investment adviser.

           I do not sell anything other than my writing.

Copyright Colin Nicholson    www.bwts.com.au         colin@bwts.com.au
                            Introduction
  Application of my comments depends on:

            The kind of investor you are

            Your investment plan.




Copyright Colin Nicholson      www.bwts.com.au   colin@bwts.com.au
      Two Basic Groups of Investors
           1. Buy-and-hold investors
           2. Active investors

 A simple definition in terms of time frame...




Copyright Colin Nicholson   www.bwts.com.au   colin@bwts.com.au
DJS - DAVID JONES LTD > -2.9% -10 to 339 Ex Div 101007 13c (100%)                  M @ D 271195-170308
                                                                                                          600


                                                                                                          500
  Active Investor
                                                               Sell
                                                                                                          400




                                                                                                          300




                                                                                                          200
                                                                                                          180
                                   Buy
                                                                                                          160

                                                                                                          140

                                                                                                          120


                                                                                                          100

                                                                                                          90

 1995   1996    1997    1998   1999    2000    2001   2002    2003   2004   2005   2006     2007   2008


  Copyright Colin Nicholson                    www.bwts.com.au                            colin@bwts.com.au
XAO - ALL ORDINARIES INDEX > -.5% -26.2 to 4934.6                            M @ M 310128-290808
                                                                                                   7000
                                                                                                   6000
                                                                                                   5000

  Buy-and-hold Investor                                                                            4000
                                                                                                   3000
  e.g. Age 21 to Death                                                                             2000
  Chart covers the last 80 years                                                        Sell
                                                                                                   1000
                                                                                                   900
                                                                                                   800
                                                                                                   700
                                                                                                   600
                                                                                                   500
                                                                                                   400
                                                                                                   300

                                                                                                   200



Buy                                                                                                100
                                                                                                   90
                                                                                                   80
                                                                                                   70
                                                                                                   60
                                                                                                   50
                                                                                                   40
                                                                                                   30

                                                                                                   20

  1930         1940          1950         1960         1970        1980   1990       2000


  Copyright Colin Nicholson                      www.bwts.com.au                 colin@bwts.com.au
           Basic Bear Market Strategy
                  for Investors
   Active investors
   Should be mostly in cash

   Buy-and-hold investors
   Should be sitting pretty…




Copyright Colin Nicholson   www.bwts.com.au   colin@bwts.com.au
                   Buy-and-hold investors
                   should be sitting pretty

                            Why?
   Because they simply harvest dividends…




Copyright Colin Nicholson   www.bwts.com.au   colin@bwts.com.au
XAO - ALL ORDINARIES INDEX > -.5% -26.2 to 4934.6                        D @ D 020101-260908
                                                                                               7000



      The 2003 – 2007                                                                          6000

        Bull Market
    The bear market has                                                                        5000
    not wiped out all the gains
    from the bull market
                                                                                               4000




                                                                                               3000




                                                                                               2600

    2001         2002          2003          2004      2005      2006   2007         2008


  Copyright Colin Nicholson                    www.bwts.com.au                 colin@bwts.com.au
                 The Bull Market and Since

                                         All Ordinaries
                  Financial Year         Accumulation
                                          Index Return
                        2003-04             +22.37%
                        2004-05               +24.75%
                        2005-06               +24.20%
                        2006-07               +30.28%
                        2007-08               -12.12%
                  2008-09 so far               -6.13%
Copyright Colin Nicholson         www.bwts.com.au         colin@bwts.com.au
         The Bull Market and Since
   Growth of $100,000 invested 1 July 2003
                                 All Ordinaries
                  Financial Year Accumulation
                                      Index
                     2003-04       $122,370
                       2004-05           $152,657
                       2005-06           $189,599
                       2006-07           $247,010
                       2007-08           $217,073
                  2008-09 so far         $203,766
Copyright Colin Nicholson        www.bwts.com.au    colin@bwts.com.au
   My method is active investing.
   That is all I will talk about from now

   Cautions
   Involves market timing
   Is not easy to do
   Is more risky than buy-and-hold
   Requires knowledge and experience
   Cost of failure is devastating.


Copyright Colin Nicholson   www.bwts.com.au   colin@bwts.com.au
                             Active investors
                            should be in cash

                                 Why?
      Because the stockmarket is cyclical…




Copyright Colin Nicholson        www.bwts.com.au   colin@bwts.com.au
                        Dow Theory Market Phases

                                                Abandonment
                             Rampant            of Hopes
                             Speculation
                                                           Decreasing
                                                           Earnings
               Increasing
               Earnings                        Sell                     Distress
                                               progressively            Selling
Reviving
Confidence
                              Buy
                              progressively             Start
                                                        again

              Primary Bull Market               Primary Bear Market

 Copyright Colin Nicholson            www.bwts.com.au             colin@bwts.com.au
XAO - ALL ORDINARIES INDEX > -.5% -26.2 to 4934.6                       M @ M 310102-300908
                                                                                              7000


 Active Investors
                           Sell progressively                                                 6000




                                                                                              5000




                                                                                              4000




                                                                                              3000
                                                    Buy progressively
                                                                                              2600

     2002           2003            2004            2005     2006   2007          2008


  Copyright Colin Nicholson                    www.bwts.com.au             colin@bwts.com.au
                                My Investment
                                Performance
                     Year %Return                Market %          Diff
                  2000/01   9.69                    8.85           0.84
                  2001/02   2.11                   -4.50           6.61
                  2002/03  20.61                   -1.08          21.69
                  2003/04  17.48                   22.37          -4.89
                  2004/05  26.88                   24.75          2.13
                  2005/06  33.62                   24.20          9.42
                  2006/07  45.25                   30.28          14.97
                  2007/08  -5.11                  -12.12           7.01
                  2008/09  1.20*                  -6.13**          7.33
                            *After two months   ** After three months

Copyright Colin Nicholson             www.bwts.com.au                   colin@bwts.com.au
                          Value of $100,000
                        invested 1 July 2000
                          Year           Colin            Market
                       2000/01          109,690          108,845
                       2001/02          112,004          103,946
                       2002/03          135,089          102,818
                       2003/04          158,702          125,819
                       2004/05          201,361          156,955
                       2005/06          269,059          194,932
                       2006/07          390,808          253,961
                       2007/08          370,838          223,181
                       2008/09          375,288*         209,500**
                            *After two months   ** After three months

Copyright Colin Nicholson              www.bwts.com.au                  colin@bwts.com.au
    Three Important Bear Market Tasks
1. Review our written investment plan
   Have a clear strategy for market exposure
   through the bull and bear market cycles
2. Develop a list of promising stocks to buy
   Have clear criteria which stocks must meet
   Continue to monitor these stocks
3. Improve our knowledge
   Read books on
        Investment strategy (incl. history)
        Analysis (fundamental & technical)
        Decision-making
   Take courses.

Copyright Colin Nicholson   www.bwts.com.au   colin@bwts.com.au
 Dow Theory
 Bull Market                                       We are now here
 Phases                                          Abandonment
                             Rampant             of Hopes
                             Speculation
                                                         Decreasing
                                                         Earnings
               Increasing
               Earnings
                                                                    Distress
                                                                    Selling
Reviving
Confidence
                                              These are still
                                              ahead of us
              Primary Bull Market              Primary Bear Market

 Copyright Colin Nicholson            www.bwts.com.au          colin@bwts.com.au
   What Should we be Looking For?
1. Bear market phase three (distress selling)…




Copyright Colin Nicholson   www.bwts.com.au   colin@bwts.com.au
        Signs of Bear Market Phase 3
               (Distress Selling)
    Significant fundamental under valuation
    Unemployment
    Bad news discounted
    Low public participation
    Decreased media coverage
    Bankruptcies.



Copyright Colin Nicholson   www.bwts.com.au   colin@bwts.com.au
   What Should we be Looking For?
   1. Bear market phase three (distress selling)

   2. And/or a Coppock indicator signal…




Copyright Colin Nicholson   www.bwts.com.au   colin@bwts.com.au
XAO - ALL ORDINARIES INDEX                                                        300993-300908
                                                                                                  7000


   When the Coppock                                                                               6000

   turns up from below
   zero, begin buying                                                                             5000

   uptrending stocks
   for long term                                                                                  4000
   appreciation
                                                                                            ?
                                                                                                  3000




                                                                                                  2000

                                                                                                  1800
                                                                                                  400


                                                                                                  Copp



                                                                                                -200

 93    94    95     96       97   98   99    00   01   02     03   04   05   06     07    08


 Copyright Colin Nicholson                  www.bwts.com.au                   colin@bwts.com.au
   What Should we be Looking For?
   1. Bear market phase three (distress selling)

   2. And/or a Coppock indicator signal…

   3. Charts showing upward trending stocks

   4. Which are cheap

   5. The market begins to trend upwards…

Copyright Colin Nicholson   www.bwts.com.au   colin@bwts.com.au
XAO - ALL ORDINARIES INDEX > -.5% -26.2 to 4934.6                       W @ W 270804-260908
                                                                                              7000
MOV AVS 52(0) week    5736.4808




                                                                                              6000




                                                                                              5000




                                                                                              4000


                                            52-week moving average


                                                                                              3400

        2004                  2005                  2006         2007          2008


  Copyright Colin Nicholson                    www.bwts.com.au              colin@bwts.com.au
XAO - ALL ORDINARIES INDEX > -.5% -26.2 to 4934.6                          W @ W 031204-260908
                                                                                                 7000
EXP MOV AVS 52(0) week 15% band




                                                                                                 6000

                                     MA+15%




                                                                                                 5000



                                                                        MA-15%
                                                    52-week MA



                                                                                                 4000


                                                                                                 3800

        2004                  2005                   2006        2007               2008


  Copyright Colin Nicholson                    www.bwts.com.au                   colin@bwts.com.au
 Good Active Investors Have
 Patience
 Wait for the last phase of the bear market
 Discipline
 Clear criteria for which stocks to buy.




Copyright Colin Nicholson   www.bwts.com.au   colin@bwts.com.au
    Strategy for the Year Ahead
    Sell speculative stocks still held
    Sell downward trending stocks
    Diversify the portfolio
    Focus on stocks with a margin of safety
        Low PE ratio
        High dividend yield
        Low debt to equity ratio
    Only buy stocks trending up…

Copyright Colin Nicholson   www.bwts.com.au   colin@bwts.com.au
CSL - CSL LTD                                               240304-260908
                                                                            5000


                                                                            4000

   This is an uptrend
       (OK to buy if cheap)                                                 3000




                                                                            2000
                                                                            1800
                                                                            1600

                                                                            1400

                                                                            1200


                                                                            1000
                                                                            900

                                                                            800

                                                                            700

                                                                            600

       2004               2005     2006            2007      2008


  Copyright Colin Nicholson      www.bwts.com.au          colin@bwts.com.au
NAB - NATIONAL AUSTRALIA BANK                                240304-260908
                                                                             5000




                                                                             4000




                                                                             3000




    This is a down trend
              (never OK to buy)                                              2000


                                                                             1800

       2004               2005      2006            2007      2008


 Copyright Colin Nicholson        www.bwts.com.au          colin@bwts.com.au
     My complete Investment plan
    with examples and case studies




                                                   $49.95
                                                      From
                                              The Educated Investor
                                                       or
                                                www.bwts.com.au




Copyright Colin Nicholson   www.bwts.com.au              colin@bwts.com.au

				
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