The Dilemma:
When a stock was recommended to me in the distant past and subsequently rose, a certain twist of the mind made it my brilliant decision. A share price fall had me calling for the head of the irresponsible advisor. Hence, I have made my own decisions for some time and am comfortable being fully accountable.
So in an act of sheer bravery that risked family disharmony, I undertook to manage my brother's rather substantial share portfolio about four years ago. Firstly, I had to extricate him from the fund managers and financial planners who were pedalling conflicted-advice. In short, I had seen too much in the commission-incentivised corporate world. Look no further than today's call for a Royal Commission into the financial planning arm of the Commonwealth Bank of Australia (ASX: CBA).
The Plan:
As the money is not mine, I feel there is a paramount responsibility to preserve capital. So my plan drew upon a lifetime of investing and a view that interest rates would be lowered due to deflationary forces in the economy. Yes, there was widespread discounting in retail four years ago.
The golden rules were as follows:
1. Due to structural change, avoid retail and media stocks such as JB Hi-Fi Limited (ASX: JBH) and Fairfax Media Limited (ASX: FXJ).
2. Due to deflation and declining world growth avoid resource stocks including Fortescue Metals Group Limited (ASX: FMG), BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO).
3. Take advantage of declining interest rates by investing in high-yielding stocks such as Telstra Corporation Ltd (ASX: TLS) and Ardent Leisure Group (ASX: AAD).
4. Use the dividend payments to invest in growth stocks such as REA Group Limited (ASX: REA) and Greencross Limited (ASX: GXL).
5. Avoid airline stocks such as Qantas Airways Limited (ASX: QAN). These stocks are up and down like a fiddler's elbow because of the number of factors that cannot be controlled that impact on airlines' performance. Hence the warnings issued by Warren Buffett about airlines' business models.
6. Avoid banking stocks due to concerns over the property market. Both Commonwealth Bank and Westpac Banking Corp (ASX: WBC) are the most exposed of the big four. While this has not been a winning strategy to date, I remain comfortable maintaining this view.
7. Invest in gold stocks to partially counterbalance any wider market pullbacks. The two stocks are Independence Group NL (ASX: IGO) and Beadell Resources Ltd (ASX: BDR). Thankfully Newcrest Mining Limited (ASX: NCM) was ignored as they are a relatively high-cost producer.
The Big Winner:
Over 50% of the total investable funds were allocated to one stock in Telstra Corporation Ltd (ASX: TLS) at an average price of around $3.30. This investment alone will potentially set up a long and carefree retirement. This allocation sounds irresponsible, but at the time people were viewing Telstra through the prism of past shortcomings, without considering the implications of certain income payments from the NBN deal that underpins the sustainable fully franked dividend.
Regrets I have a few….
- Investing in mining services stocks, which partly transgressed golden rule number two above.
- Agreeing to a small allocation of funds to my brother who wanted "play money" for speculative stocks. I have never professed to understand drilling updates from small oil companies!
What Now:
My brother and I are still on speaking terms. In fact the relationship may have been enhanced by daily phone "meetings" when general chit-chat is interrupted by the occasional share recommendation. Despite having bought the above-mentioned six stocks, in my opinion they are still excellent buys now for the medium-to-long term investor. In addition a free report below may well assist you in achieving your own carefree retirement?
