The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) hovers near a 14-month high, but one leading analyst thinks shares could be set to soar remarkably higher in the run-up to Christmas.
"Is now a good time to buy shares?"
It's the single question I'm asked most often. My answer may surprise…
As a word of warning, this piece might take you ten minutes to read, but by the end, you'll hopefully have learnt some valuable investing lessons.
Before I let you know how I play these choppy markets, I wanted to turn to comments in The Australian Financial Review from Goldman Sachs head of institutional sales Richard Coppleson…
"I've been wrong on the market in the last few weeks as I have been waiting for one more sharp and short sell-off that would be the trigger I've been anticipating – that would be the starting gun to get very long for a sensational December quarter rally that I still think will be a very big one….each day I look at the market I become even more confident that the fourth-quarter rally will be quite remarkable…"
I applaud Mr Coppleson for his honesty, and his optimism.
In a world where we have politicians constantly spinning the truth and Lance Armstrong being revealed as possibly the greatest sporting cheat ever, it's refreshing to see someone admit they were wrong.
I've been wrong, too. Many times.
I've invested in the wrong stocks at the wrong time. I've owned stocks where I've lost 80% of my money. I've owned stocks that have done nothing for the last 5 years…Woolworths (ASX: WOW) anyone?
Yesterday one of my stocks plunged 15% in a single trading day.
Shares in rare earth minerals company, and retail investor favourite Lynas Corp (ASX: LYC), plunged after the company announced that the Malaysian High Court postponed a decision on the company's temporary operating licence for its rare earths plant until November 8.
Piling on top of my pain was Deutsche Bank, the investment bank slapping a sell rating on the shares, with a price target of $0.65, down 21 per cent on its previous target.
Ouch.
I bought shares in Lynas at around $1. I'm currently sitting on 30% loss.
It's not pleasant.
But it's a far from disastrous situation for my portfolio, and indeed my total wealth.
You see, I knew Lynas was a higher-risk investment. I knew there was significant downside if they were not granted a licence to operate their Malaysian rare earths plant. I knew, in a worst case scenario, they might be forced to abandon their plans to process rare earths in Malaysia altogether, writing off millions of dollars in the process.
But I figured the odds were in my favour. The downside was limited, whilst the upside opportunity was exceptional.
At its heart, investing is an odds game. There is never certainty, never a sure-thing.
Even at the depths of then GFC, when the S&P/ASX 200 was trading below 3,500 and blue-chip companies like Commonwealth Bank (ASX: CBA) were trading at $24, there was no guarantee of success.
Up 5,000%…in my dreams
Hindsight is a wonderful thing. I joke that my personal 'hindsight portfolio' is up 5,000% over the past 5 years.
Of course, the joke is on me, because I didn't buy Domino's Pizza (ASX: DMP) at $2.50 in 2008 and I didn't buy Silver Lake Resources (ASX: SLR) at 37 cents in 2009.
Still, you don't have to pick the bottom of the market to build considerable wealth through investing in shares.
To prove the point, and admittedly it's still early days, we suggested Motley Fool Take Stock readers take a look at the above-mentioned Silver Lake Resources in August this year, concluding with…
"Today the shares trade around $2.80, giving Silver Lake a market capitalisation of around $620 million. Should the company meet its goals, its share price looks to have substantial upside potential."
Since then, Sliver Lake shares are up close to 40%. Not bad in just over 2 months. We trust you jumped on for the ride.
Two exceptional investing decisions
Back to Lynas, a stock that's in my real portfolio, not my hypothetical hindsight portfolio.
Although I'm under-water by 30%, if you excuse my modesty, I think I made two exceptional investing decisions.
The first was to recognise Lynas was a candidate for the speculative portion of my share portfolio…the little bit of fun money I occasionally throw into such situations.
If Lynas went to zero, it would hurt my investing ego far more than it would my overall wealth.
Motley Fool Share Advisor subscribers may already be familiar with the portfolio pyramid concept, where we recommend the following…
Core stocks: 40 to 60% of your portfolio
Growth stocks: 30% to 50%
Speculative: 0% to 10%
The idea behind the pyramid is that each layer represents an aspirational level.
The bottom, or core level, represents safety first; its aim is to ensure a reasonable amount of retirement savings – companies like Woolworths or Telstra (ASX: TLS).
The growth level embodies potential – a company like Motley Fool Share Advisor recommended stock Industrea (ASX: IDL) fitted into this category. Industrea shares jumped 40% when US giant General Electric agreed to take them over. Motley Fool Share Advisor subscribers have since been advised to sell Industrea and bank their profits. In that case, the downside risk was larger than the upside potential.
Your shot at riches
The speculative capstone is our hopeful shot at riches, and where the Lynas' of the world come into play.
When you have built solid core and growth levels and are on track for a comfortable retirement, you may consider speculative companies. These are your lottery tickets and should only be purchased with money you can afford to lose.
As for Lynas, although the outcome to date is not as I'd expected, I believe I got the process mostly right.
On the upside, I thought the shares could go as high as $3, a triple from my buy price. They still could.
On the downside, I thought the shares could halve in a worst-case scenario, a 50% loss.
In short, the odds were in my favour. They might well still be in my favour. Deutsche Bank might have a 65 cents target price on Lynas, but JPMorgan has a target of $1.50. Let the race begin.
Which brings me onto my second exceptional investing decision, which is saying something on a stock that's currently down 30% on my buy price…
Bring on my 200% winner
My second exceptional investing decision was not to throw good money after bad.
Last month, Lynas shares traded below 60 cents and up to 90 cents. I waited.
I'm still waiting. I might miss out on a big winner if the November 8 High Court decision goes in Lynas' favour, but I'm no lawyer, and I'm not prepared to take a punt on the deliberations of judges in some faraway country…even with the speculative portion of my portfolio.
Plus, I think, in fact I know, that if the decision goes in their favour, there will be another opportunity to buy Lynas shares, at a time when the future is much more certain.
In the investing business, they call that a de-risked stock. I'd say, bring on a share price of $3!
Bionic stocks
There are around 2,000 companies quoted on the ASX. Most are complete dross…speculative penny stocks that will never, ever make a profit.
There are a handful of truly world-class Australian companies – think CSL (ASX: CSL), Cochlear (ASX: COH) and ResMed (ASX: RMD).
I call them bionic stocks, and not just because Cochlear makes the bionic ear. More on bionic stocks another day…
The fly in the ointment is the valuation. Amazingly I'm not the only investor to recognise the quality, and sustainable competitive advantages of these three companies.
A "quite remarkable rally"
Back to Richard Coppleson's quote at the top of this note, and his prediction that the "fourth-quarter rally will be quite remarkable."
I'll give him huge credit for his boldness. He might be right. Today might be the time to buy. The fourth-quarter is but young, and the ASX is up today, albeit modestly.
Yesterday, I bought some shares in a high-quality ASX company. And no, it's not any of the companies mentioned in this note — The Motley Fool trading rules don't allow us to trade any company we've mentioned for two trading days either side.
I'll let you into three little secrets…
1) My colleague Scott Phillips also bought shares in this company. Hopefully it's a case of great minds thinking alike. Some recent stunning news from the company tipped us both over the edge.
2) The company is a Motley Fool Share Advisor recommended stock. We like to eat our own cooking.
3) The stock is already up since we recommended it to Motley Fool Share Advisor members. We're thrilled our members could hopefully have secured a far better starting price than us. After all, the service is for you, not us. But we're not bothered. If we're right, a few percentage points here and there at the start will make little difference to our overall returns, over the long-term.
If you've read this far, congratulations.
Hopefully I've given you an insight into how I invest, how I've saved a bundle of cash even though I'm 30% in the hole on my Lynas investment, and how The Motley Fool follows its purpose…of helping the world invest – better.
Finally, in answer to the question posed right at the top of this note…
"Is now a good time to buy shares?"
When it comes to building a market-crushing stock portfolio, the time to get started is always "right now."
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Until next time, as ever, I wish you happy, profitable investing.
Of the companies mentioned above, Bruce Jackson has an interest in Lynas, Woolworths, Telstra and Commonwealth Bank. The Motley Fool's disclosure policy is accountable. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691).
