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Shaun van den Berg Shaun van den Berg Head of Client Education at PSG Online Head of Client Education at PSG Online Welcome to Marketworx: Welcome to Marketworx: Centurion Centurion Tuesday, 24 July 2012 Tuesday, 24 July 2012

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Page 1: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Shaun van den BergShaun van den Berg

Head of Client Education at PSG OnlineHead of Client Education at PSG Online

Welcome to Marketworx: Centurion Welcome to Marketworx: Centurion

Tuesday, 24 July 2012Tuesday, 24 July 2012

Page 2: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Make Make MoneyMoney

InvestorInvestor

TraderTrader

FundamentalFundamentalAnalysisAnalysis

Research Research ToolsTools

Value Value InvestorInvestor

GrowthGrowthInvestorInvestor

InvestingInvestingfor for

DividendsDividends

TechnicalTechnicalAnalysisAnalysis

WEN ChartingWEN Charting

Break-outBreak-outTradingTrading

Unit Unit TrustsTrusts ETFETF

EquitiesEquities

EquitiesEquities CFDCFD

Marketworx AgendaMarketworx Agenda

SSFSSF

Page 3: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• To create a second income

• To replace income

• To provide for children’s education

• To achieve Financial Freedom …

Roadmap…to Wealth CreationRoadmap…to Wealth Creation

Financial ObjectivesFinancial Objectives

Page 4: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Financial FreedomFinancial Freedom

90% Income 90% Income from from ActiveActive

IncomeIncome90% 90% Passive Passive Income Income from from InvestmentsInvestments

10% Income from 10% Income from Investments (Passive)Investments (Passive)

10% Income from 10% Income from Active IncomeActive Income

Page 5: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Knowledge & ExperienceKnowledge & Experience

Risk ProfileRisk Profile

Time Time MoneyMoney

Financial ObjectivesFinancial Objectives

NoviceNovice?? Advanced?Advanced? Intermediate?Intermediate?

Roadmap …to Wealth CreationRoadmap …to Wealth Creation

Investor?Investor? Trader?Trader? Both?Both?

Page 6: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Investor or Trader (or Both?)Investor or Trader (or Both?)

Investor

• Passive Management• View > 3-years

– Buy & Hold– Quality, Undervalued

Shares– Balanced Portfolio

• Capital Growth• Dividend Income & Growth• Low Brokerage Costs• Capital Gains Tax (CGT)

– R30 000 exempt– 33.3% inclusion rate– 13.32%

R100 000 Capital GainR100 000 Capital GainLess R 30 000 Exemption Less R 30 000 Exemption = R 70 000 Taxable Gain= R 70 000 Taxable GainInclusion rate 40% x 33.3% Inclusion rate 40% x 33.3% = 13.32%= 13.32% = R 9 324 Tax Payable= R 9 324 Tax Payable

Page 7: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Active Management• View < 3-years

– Position Trading – Swing Trading– Jobbing (Speculating)

• Capital Growth– Buy Low & Sell High– Sell High & Buy Low

• Higher Brokerage Costs• Income Tax

– 40%

Investor or Trader (or Both?)Investor or Trader (or Both?)

TraderTraderInvestor

• Passive Management• View > 3-years

– Buy & Hold– Quality, Undervalued

Shares– Balanced Portfolio

• Capital Growth• Dividend Income & Growth• Low Brokerage Costs• Capital Gains Tax (CGT)

– 33.3% inclusion rate– R30 000 exempt– 13.32%

Page 8: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Investor MatrixInvestor Matrix

PrudentPrudent

Speculative Speculative

AggressiveAggressive

ConservativeConservative

REWARD

High

Low High

Low

RISK

Page 9: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

“If you have the wrong reasons why you want to get started, you will have the wrong reasons for wanting to stop (quit).” – John Maxwell

Extra-Ordinary Person: – Extra Change– Extra Thinking – Extra Effort– Extra Time– Extra Planning– Extra Help

Why do you want to get involved in the share Why do you want to get involved in the share market? market?

Page 10: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

PSG Online websitePSG Online website

Page 11: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Online Trading CourseOnline Trading Course

Select TutorialsSelect Tutorials

Page 12: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Marketworx Tutorials Marketworx Tutorials

Page 13: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Marketworx Tutorials Marketworx Tutorials

Page 14: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Marketworx PreparationMarketworx Preparation

Activity #2: Apply the Fundamental Analysis checks to the shares in your initial watch list.

Activity #4: Apply the portfolio management checklist to your “prospect” watch list (i.e. after

reducing the “initial” watch list) Remember risk management.

Activity #3: Compile graphs using the technical analysis indicators you have learned about to the

shares in your Watchlist.

Activity #5: Start trading. Build a share portfolio. Select the best opportunities based on your

fundamental and technical criteria.

Activity #1: Ensure that you have compiled your Watch lists in your PSG Online trading account

before moving onto step 2!

Page 15: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Marketworx Program Marketworx Program

Before MarketworxBefore Marketworx

Register on PSG Online/ Create a Watch List /Share / Register on PSG Online/ Create a Watch List /Share / Portfolio Management / Start TradingPortfolio Management / Start Trading

During MarketworxDuring Marketworx

Financial Goals / Trader, Investor or both?Financial Goals / Trader, Investor or both?Investment Strategy / Trading Strategy Investment Strategy / Trading Strategy

Post MarketworxPost Marketworx

Review Marketworx presentation / More questionsReview Marketworx presentation / More questionsFundamental & Technical Tasks / Simulator TradingFundamental & Technical Tasks / Simulator Trading

After Six MonthsAfter Six Months

Open a Trading (EQT) Account / ETF & Unit Trust Accounts / Open a Trading (EQT) Account / ETF & Unit Trust Accounts / SSF / CFD Accounts / Offshore AccountSSF / CFD Accounts / Offshore Account

Page 16: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• How to choose your first shares– Step # 1: Narrow down the choice– Step # 2: Gather fundamental information– Step # 3: Gather technical information– Step # 4: Create a Balanced Portfolio– Step #5: Start Trading

Getting Started: Five StepsGetting Started: Five Steps

Page 17: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Step #1: Narrow down the Choice– Top 100 Simulator List– Prospecting: Top-Down Approach– Prospecting: Financial Journalism– Initial Watch Lists (3 x 30)

Getting Started: Step 1Getting Started: Step 1

Page 18: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Narrow Down the ChoiceNarrow Down the Choice

Select Indices

Page 19: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Top 100 SharesTop 100 Shares

SelectFutures

Select Select Simulator Simulator

ListList

Print Print ShareShare

ListList

Page 20: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Step #1: Narrow down the Choice– Prospecting: Top-Down Approach– Prospecting: Financial Journalism

Getting Started: Step 1 (a)Getting Started: Step 1 (a)

Page 21: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• International Markets• Economic Indicators• Currencies• Precious Metals• Local Markets• Specific Sectors• Specific Shares• Checklists

Top - Down ApproachTop - Down Approach

Page 22: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

International MarketsInternational Markets

Bullish

Bullish

Bearish (Just!)

Bearish (Just!)

Page 23: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

International MarketsInternational Markets

Bearish (Just!)

Bearish

Bullish (Just!)

Page 24: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Oil & CopperOil & Copper

Bearish

Bearish

Page 25: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Precious MetalsPrecious Metals

Bearish

Bearish

Bearish

Page 26: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Currencies (US $)Currencies (US $)

USD strength / EUR weakness

JPY strength/ USD weakness

USD strength / GBP weakness

Page 27: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Currencies (ZAR)Currencies (ZAR)

ZAR weakness / USD strength

ZAR strength / EUR weakness

ZAR weakness / / GBP strength

Page 28: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

JSE All Share IndexJSE All Share Index

Bullish

Resistance

Support

Resistance

Page 29: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Local Market (Sectors)Local Market (Sectors)

Bullish (Just)

Bullish

Bullish

Bearish

Page 30: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Local Market (Industry)Local Market (Industry)

Bearish

Bullish

Bearish

Bearish Bullish

Page 31: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Financial JournalismFinancial Journalism

• Read! Read! Read!– Bloomberg / Reuters/ CNN Money– PSG Online / MoneyWeb / Fin24– Business Day / Business Report/ Sake– Financial Mail / FinWeek

• Beware Analysis Paralysis• Scan Headlines – Shares you know• Look for Bad News

Page 32: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Getting Started: Step 1 (b)Getting Started: Step 1 (b)

• Step #1 a: Narrow down the Choice– Prospecting: Top-Down Approach– Prospecting: Financial Journalism

– Step # 1 b: Create Initial Watch Lists (3 x 30)– Mining Shares– Financial Shares– Industrial Shares

Page 33: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Creating a Watch ListCreating a Watch List

Page 34: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Universe of Shares Universe of Shares

± ± 400 Shares400 Shares

Watch ListsWatch Lists

3 x 30 Shares3 x 30 Shares

Core Portfolio

8 - 12 SharesStep 1:Prospecting

Process

Step 2:AnalysisProcess

Getting Started: Step 1 (b)Getting Started: Step 1 (b)

Page 35: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Creating a Watch ListCreating a Watch List

Step 1:Step 1:ClickClick

Watch ListWatch List

Step 3:Step 3:Click Add Click Add

buttonbuttonStep 5:Step 5:

Click Add Click Add buttonbutton

Step 6:Step 6:Select DustbinSelect Dustbin

to remove to remove

Step 4:Step 4:EnterEnter

Share CodeShare Code

Step 2:Step 2:EnterEnter

Watch List Watch List NameName

Page 36: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Initial Wish ListInitial Wish List

View View Share Share

MovementMovement

Page 37: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Initial Wish List – Ranking MoveInitial Wish List – Ranking Move

Select Select Column Column to Rankto Rank

Page 38: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Step #1: Narrow down the Choice– Prospecting: Top-Down Approach– Prospecting: Financial Journalism

• Step #2: Gather Fundamental Information– Share Info Page– Company Analysis

Getting Started: Step 2Getting Started: Step 2

Page 39: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Initial Wish List(s)Initial Wish List(s)

Select Watch

List

Select ShareCode

Page 40: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Share Info PageShare Info Page

Page 41: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Research Tools: Share InfoResearch Tools: Share Info

SelectCompanyAnalysis

Page 42: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Research: Company AnalysisResearch: Company Analysis

Page 43: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Step #1: Narrow down the Choice– Prospecting: Top-Down Approach– Prospecting: Financial Journalism– Initial Watch Lists (3 x 30)

• Step #2: Gather Fundamental Information– Share Info: Company Analysis

• Step #3: Gather Technical Information– Technical Chart / Interactive Chart

Getting Started: Step 3Getting Started: Step 3

Page 44: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Research Tools: Share InfoResearch Tools: Share Info

Select Select InteractiveInteractive

ChartChart

Select Select TechnicalTechnical

ChartChart

Page 45: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Research Tools: Technical ChartResearch Tools: Technical Chart

Page 46: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Research Tools: Interactive ChartResearch Tools: Interactive Chart

Page 47: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Step #1: Narrow down the Choice

• Step #2: Gather Fundamental Information

• Step #3: Gather Technical Information

• Step #4: Create a Balanced Portfolio– Structure– Spread – Stop Loss?

Getting Started: Step 4Getting Started: Step 4

Page 48: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Build a Balanced PortfolioBuild a Balanced Portfolio

Large Large CapCap

(RES)(RES)

Large Large CapCap

(IND)(IND)

Large Large CapCap

(IND)(IND)

Large Large CapCap(FIN)(FIN)

50%50%

Mid Mid CapCap

(MIN)(MIN)

Mid Mid CapCap

(IND)(IND)

Mid Mid CapCap

(IND)(IND)

Mid Mid CapCap(FIN)(FIN)

40%40%

10% Cash 10% Cash Mid Mid CapCap

(MIN)(MIN)

Mid Mid CapCap

(IND)(IND)

Mid Mid CapCap

(FIN)(FIN)

Mid Mid CapCap

(IND)(IND)

Page 49: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Buy @ 1000cBuy @ 1000c

Stop lossStop loss

10 % of 1000c10 % of 1000c

= 100c= 100c

Value shares @ 900cValue shares @ 900c

@ 1500c@ 1500c

stop loss = 1350cstop loss = 1350c

@ 2000c@ 2000c

stop loss = 1800cstop loss = 1800c

Stop Loss LevelStop Loss Level

Stop Loss Strategy (Equities) Stop Loss Strategy (Equities)

Page 50: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Step #1: Narrow down the Choice• Step #2: Gather Fundamental Information• Step #3: Gather Technical Information• Step #4: Create a Balanced Portfolio

• Step #5: Start Trading

Getting Started: Step 5Getting Started: Step 5

Page 51: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Select Simulator AccountSelect Simulator Account

Select Select SIMSIM

Reset Reset AccountAccount

CheckCheckR100 000R100 000

Page 52: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Select New OrderSelect New Order

Enter Enter Share Share CodeCode

& & Click Click GOGO

Select Select New OrderNew Order

Select BuySelect Buy& Enter & Enter QuantityQuantity

Enter PriceEnter PriceClick Click

SubmitSubmit

EnterEnterQuantityQuantity

Page 53: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Select Order BookSelect Order Book

Select Select Order Order BookBook

Page 54: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Select Portfolio HoldingsSelect Portfolio Holdings

Select Select PortfolioPortfolio Brokerage Brokerage

CostsCosts

Page 55: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Set up a Price WatchSet up a Price Watch

Enter Enter Share Share CodeCode

& & Click Click GOGO

Select Select Price Price

WatchWatchSelect Select Trailing %Trailing %

Click Click SubmitSubmit

EnterEnterPercentagePercentage

Page 56: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Set up a Price WatchSet up a Price Watch

Select Select Price Price

WatchWatch

Page 57: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Macro Fundamentals (Economic Analysis)Macro Fundamentals (Economic Analysis)

Page 58: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Share Market AnalysisShare Market Analysis

Share MarketShare MarketAnalysisAnalysis

FundamentalFundamentalAnalysisAnalysis

Technical Technical AnalysisAnalysis

MacroMacroFundamentalsFundamentals

MicroMicroFundamentalsFundamentals VolumeVolumePricePrice

Page 59: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• General Economic Influences– Gross Domestic Product (GDP)– Fiscal & Monetary Policy– Inflation Rate– Interest Rates– The Exchange Rate

• The Investment Cycle

Economic AnalysisEconomic Analysis

Page 60: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Gross Domestic Product (GDP)Gross Domestic Product (GDP)

Average 4%Average 4%

ExpansionExpansion

ContractionContraction

Page 61: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Fiscal PoliciesFiscal Policies

Tax CutsTax CutsAdditionalAdditional

Taxes Taxes

Discourage Discourage SpendingSpending

Encourage Encourage SpendingSpending

Page 62: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Government spendingGovernment spending

Increases Increases or decreasesor decreases

in government spending in government spending

Influences Influences the business the business environmentenvironment

Government spending Government spending has a strong has a strong

“Multiplier Effect”“Multiplier Effect”

Companies that rely on

government spending

Defence, Defence, Social grants, Social grants, Education or Education or InfrastructureInfrastructure

Influence the Influence the General EconomyGeneral Economy

BudgetBudget

PrioritiesPriorities

Page 63: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Government spending - Multiplier EffectGovernment spending - Multiplier Effect

Road Road BuildingBuilding

Earthmoving Earthmoving EquipmentEquipment

SuppliersSuppliersConstructionConstruction

WorkersWorkers

ConcreteConcreteMaterialsMaterials

ConsumerConsumerGoodsGoods

Page 64: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

““Multiplier Effect”Multiplier Effect”

Road Road BuildingBuilding

Earthmoving Earthmoving EquipmentEquipment

SuppliersSuppliersConstructionConstruction

WorkersWorkers

ConcreteConcreteMaterialsMaterials

ConsumerConsumerGoodsGoods

EqstraEqstra

BarworldBarworld

BellBell

WearneWearne

PPCPPC

M&R M&R HoldingsHoldings

WBHOWBHO

AvengAveng

AfrimatAfrimat

RetailersRetailers

Page 65: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Monetary PolicyMonetary Policy

Restrictive Restrictive Monetary PolicyMonetary Policy

Reduces expansion ofReduces expansion ofBusinessesBusinesses

More expensive More expensive to finance home loansto finance home loans

Increases Increases borrowing costsborrowing costs

Reduces Growth RateReduces Growth Rate of Money Supply of Money Supply

Reduces supply of fundsReduces supply of fundsfor working capitalfor working capital

Reduces demand Reduces demand for Durable goodsfor Durable goods

Affects all segments Affects all segments of economy & of economy &

Relationship withRelationship withother economiesother economies

Page 66: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

InflationInflation

• Government, industry & consumer over spending.

• Printing too much money to finance this luxury.

• By-product of too low interest rates promoting too much growth too quickly.

Page 67: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Inflation (Continued)Inflation (Continued)

Inflation causes Inflation causes differences between real differences between real & nominal interest rates & nominal interest rates

Inhibits growth & Inhibits growth & innovationinnovation

Influence the trade Influence the trade balance & exchange ratebalance & exchange rate

Beyond domestic Beyond domestic economy - differential economy - differential

inflation & interest ratesinflation & interest rates

Changes in spending & Changes in spending & savings behaviour savings behaviour

Unexpected changes in Unexpected changes in Inflation – difficult to planInflation – difficult to plan

Page 68: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Interest rates riseInterest rates rise

Negative for profitsNegative for profits

Money is diverted to interest-Money is diverted to interest-bearing securitiesbearing securities

Market anticipates this & Market anticipates this & peaks before interest ratespeaks before interest rates

Lower share prices &Lower share prices &lower company valuationslower company valuations

Consumers spend lessConsumers spend less- Lower profits- Lower profits

Demand for Demand for moneymoney

increasesincreases

Interest Rate CyclesInterest Rate Cycles

Page 69: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Rand StrengthensRand Strengthens– R7.50 / US$R7.50 / US$

The Exchange Rate (Importer)The Exchange Rate (Importer)

Rand WeakensRand Weakens

R8.50 / US$R8.50 / US$

• Imports are cheaper Imports are cheaper • $50 000 machine @ $50 000 machine @

R7.50 = R375 000R7.50 = R375 000• Buy more importsBuy more imports

• Imports are more Imports are more expensiveexpensive

• $50 000 machine @ $50 000 machine @ R8.50 = R425 000R8.50 = R425 000

• Buy fewer importsBuy fewer imports

Page 70: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Rand StrengthensRand Strengthens

R7.50 / US$R7.50 / US$

The Exchange Rate (Exporter)The Exchange Rate (Exporter)

Rand WeakensRand Weakens

R8.50 / US$R8.50 / US$

• Exports become Exports become expensive overseas expensive overseas

• $1.00 / R7.50 = $1.00 / R7.50 = R0.1333R0.1333

• R10 Box of grapes R10 Box of grapes = $1.33 per box= $1.33 per box

• Sell less goods – Sell less goods – Not competitively Not competitively pricedpriced

• Exports become Exports become cheaper overseas cheaper overseas

• $1.00 / R8.50 = $1.00 / R8.50 = R0.1176R0.1176

• R10 Box of grapes R10 Box of grapes = $1.18 per box= $1.18 per box

• Sell more goods – Sell more goods – Competitively Competitively pricedpriced

Page 71: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Competitive?

ZAR vs USD & EURZAR vs USD & EUR

Competitive?

Rand Strength

Rand Weakness

Rand Weakness

Rand Strength

Page 72: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Inflation (Relative to Reserve Bank Target?)• Interest Rates (Going up or down?)• GDP (Above 4% or below?)• Exchange Rate (Weakening or strengthening?)

• Foreign Interest Rates (Going up or down?)

The Economy & Investment CycleThe Economy & Investment Cycle

Page 73: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Stock Market Above Average

Performance

Under Average

Performance

Interest Rates

Declining Increasing

Inflation Declining Increasing

Economy Below Average Above Average

Exchange Rates

Strengthening Weakening

Foreign Interest Rates

Declining Increasing

The Economy & Investment CycleThe Economy & Investment Cycle

Page 74: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

The Investment Cycle

GDP (Economic Growth) Interest Rates Stock Market Growth

Phase I Phase II Phase III Phase IV

Average

-

+

Phase IPhase I Phase IIPhase II Phase IIIPhase III Phase IVPhase IV

Economic Economic GrowthGrowth

Below Below AverageAverage

Above Above AverageAverage

Above Above AverageAverage

Below Below AverageAverage

Interest RatesInterest Rates DecreasingDecreasing IncreasingIncreasing IncreasingIncreasing DecreasingDecreasing

Stock MarketStock Market AboveAboveAverageAverage

BelowBelowAverageAverage

Below Below AverageAverage

Above Above AverageAverage

The Investment CycleThe Investment Cycle

Page 75: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Key Annual ForecastKey Annual Forecast

Source: www.absa.co.za

Page 76: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Sector Rotation: Relative to EconomySector Rotation: Relative to Economy

Building & Engineering

Financial ServicesIndustrialsIndustrials

Information TechnologyPackaging &

PrintingGen RetailServices

Transport

BanksFinancials

Life Assurance

MediaPaper

Short-termInsurance

Telecomms

ALSI 40ChemicalsDiamonds

Diversified IndustrialsElectronics

Mining Houses Platinum

Resources

BeveragesEducation

GoldMid Caps

Private EquitySmall Caps

SteelAlt X

FurnitureHealthcareHotels &Leisure

Metals &MineralsMining

ExplorationProperty

Under weight Over weightUnder weight

Over weightto Neutral

Underweight toNeutral

Page 77: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Income StatementIncome Statement

Balance SheetBalance Sheet

Cash Flow StatementCash Flow Statement

Financial StatementsFinancial Statements

Page 78: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Company AnalysisCompany Analysis

After determining an industry’sAfter determining an industry’soutlook is good:outlook is good:

Analyse & compare individual companyAnalyse & compare individual companyperformance within entire industryperformance within entire industry

Use Use financial ratiosfinancial ratios & & cash flow valuescash flow values to toidentify identify best companybest company in a in a promising industrypromising industry Examine Examine past performancepast performance & & future prospectsfuture prospects

Understand the company & outlookUnderstand the company & outlook

Determine Determine “Intrinsic Value”“Intrinsic Value” & compare to price & compare to price

Page 79: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

RmRmSales (Turnover or Revenue) XXXSales (Turnover or Revenue) XXXLess:Less: ExpensesExpenses (XXX) (XXX)Operating Profit (EBITDA) XXXOperating Profit (EBITDA) XXXLess:Less: Finance Costs Finance Costs (XXX) (XXX)Profit before Taxation (EBT) XXXProfit before Taxation (EBT) XXXLess:Less: Taxation on ProfitsTaxation on Profits (XXX) (XXX)Profits after TaxationProfits after Taxation XXX XXXLess:Less: Preference Dividend Preference Dividend (XXX) (XXX)Earnings (or Net Profit)Earnings (or Net Profit) XXX XXXLess:Less: Ordinary DividendOrdinary Dividend (XXX) (XXX)Retained Earnings Retained Earnings RXXX RXXX

Income Statement of Company XYZ for the Year Ended 31 December 2011Income Statement of Company XYZ for the Year Ended 31 December 2011

Financial Statements Financial Statements

RmRmXXXXXX(XXX)(XXX)XXXXXX(XXX)(XXX)XXXXXX(XXX)(XXX)XXXXXX(XXX)(XXX)XXXXXX(XXX)(XXX)RXXXRXXX

Page 80: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

EarningsEarningsNumber of shares in IssueNumber of shares in Issue

ProfitProfit Profit = Earnings

Dividends

Retained Earnings

= Earnings Per Share (E.P.S.)= Earnings Per Share (E.P.S.)

E.PS. = E.PS. = R66 000 000R66 000 000 825 000 000 825 000 000E.P.S. = 8cE.P.S. = 8c

Earnings RatiosEarnings Ratios

Page 81: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Earnings Per Share (E.P.S.) x 100%Current Share Price

Earnings RatiosEarnings Ratios

= Earnings Yield (%) (E.Y.)

E.Y. =E.Y. = 8 cents per share 8 cents per share x 100% x 100%100 cents per share100 cents per share

E.Y. = 8%

Current Share PriceCurrent Share Price Earnings Per Share (E.P.S.) Earnings Per Share (E.P.S.)

= Price / Earnings Ratio (P/E)= Price / Earnings Ratio (P/E)

P/E = P/E = 100 cents per share100 cents per share 8 cents per share 8 cents per share

P/E = 12.5 timesP/E = 12.5 times

You want a high earnings yield

You want a low P/E multipleYou want a low P/E multiple

Page 82: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Earnings RatiosEarnings Ratios

Dividends Per Share (D.P.S.)Dividends Per Share (D.P.S.) x 100% x 100%Current Share PriceCurrent Share Price

= Dividend Yield (%) (D.Y.)

D.Y. =D.Y. = 3 cents per share 3 cents per share x 100% x 100%100 cents per share100 cents per share

D.Y. = 3%D.Y. = 3% You want a high dividend yield You want a high dividend yield

Page 83: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Investor Earnings RatiosInvestor Earnings Ratios

Page 84: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

RmRmAssetsAssets 200 200Less:Less: Liabilities Liabilities (50)(50)Total (Net) AssetsTotal (Net) Assets 150150 RmRmShareholder’s Funds Shareholder’s Funds 150 150 (Capital Employed)(Capital Employed)

Balance Sheet as at 31 December 2011Balance Sheet as at 31 December 2011

How How fundsfunds are spentare spent

Where funds Where funds come fromcome from

Financial Statements Financial Statements

RmRm175175(75)(75)100100 RmRm100 100

Page 85: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Cash Flow from Operating ActivitiesCash Flow from Operating Activities

Operating Profit before tax & interestOperating Profit before tax & interestDepreciationDepreciationAmortisationAmortisationProvisionsProvisionsInterest PaidInterest PaidTaxation PaidTaxation PaidChanges in working capital (Debtors, Changes in working capital (Debtors, Creditors, Inventory, etc.)Creditors, Inventory, etc.)Net Cash provided by operating activitiesNet Cash provided by operating activities

2011 20102011 2010Rm RmRm Rm 68 5668 5614 13 14 13 1212 22 2 22 2 (3) (2)(3) (2)(20)(20) (15)(15)(21)(21) (12)(12)

5858 4444

Cash Flow StatementCash Flow Statement

Financial Statements Financial Statements

Are they Are they turning turning

cash into cash into profits?profits?

Page 86: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Turnover Growth• Operating Profit Growth• Operating Margin• Interest Cover• Earnings before Tax

(EBIT) Growth• Effective Tax Rate• Profit Attributable to

Ordinary Shareholders Growth

• Dividend Cover• Retention Rate• Earnings per Share

(EPS) Growth

Ratio AnalysisRatio Analysis

• Headline EPS Growth• Net Asset Value (NAV)

growth• Return on Equity (ROE)• Return on Tangible

Assets• Return on Capital (ROC)• Debt/ Equity (Gearing)• Share Price (Cents per

share)• Price/ Earnings (P/E)• Dividend Yield (DY)• Price/ Net Asset Value

(P/NAV)• Cash Flow / EPS

Page 87: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Fundamental Analysis ChecklistFundamental Analysis Checklist

UndervaluedUndervalued

Risk Risk ManagementManagement

ProfitableProfitable

P/E < 12.3P/E < 12.3PEG < 75%PEG < 75%

PRICE/NAV < 2PRICE/NAV < 2

ROE % ROE % > 15%> 15%

Interest CoverInterest Cover> 3 times> 3 times

Page 88: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Valuation: Valuation: PEG RatioPEG Ratio

Page 89: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

"Any company on a very high PE ratio is living on borrowed time as far as its

market rating is concerned.

Sooner or later the growth rate will slacken and the PE ratio will fall to a

more normal level and then to the average or even below it.”

John Slater

Page 90: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Although both shares are trading at a P/E of 15 our forecast growth rate is 30% for stock 1 versus 10% for stock 2.

PEG ValuationPEG Valuation

Name Share Price EPS Growth P/E PEGStock 1 100c 30% 15 50%Stock 2 200c 10% 15 150%

Average 20% 15 75%

This means Stock 1 trades at a PEG of 50% (15/30),which is considered very cheap; Stock 2 at 150% (15/10) is expensive..

On average the sector is on a PEG of 75% (15/20), and, therefore, indicating value.

Page 91: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• PEG = P/E Ratio / Forecast average growth over next 5 years

• Select companies with not only low P/E ratios as such, but those companies with P/E ratios low relatively to their EPS growth

• Trying to target the better companies trading on low P/E’s

• Earnings growth rate must be higher than the P/E ratio at time of investing

ValuationsValuations

Page 92: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Net Asset Value (NAV)Net Asset Value (NAV)Valuation: Valuation:

Page 93: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Net Asset Value (NAV) is the Ordinary Shareholders' Funds divided by total number of shares issued.

• In theory if the company sells all of its assets at recorded prices & pays off all debt, the net amount will then be available for distribution to shareholders.

• Share prices should rarely trade below this value. .

Net Asset Value (NAV)Net Asset Value (NAV)

NAV = NAV = Ordinary Shareholder’s FundsOrdinary Shareholder’s Funds Total number of shares issued Total number of shares issued NAV = RNAV = R276 000 000276 000 000 850 000 000 850 000 000 = 32.4 cps = 32.4 cps

Page 94: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Price/Net Asset Value (P/NAV) together with return on equity (ROE) is one of the most powerful valuation tools, but is seldom used correctly.

• The calculation is simply the current share price divided by the NAV.

Price / Price / Net Asset Value (P/NAV)Net Asset Value (P/NAV)

P/NAV = P/NAV = Current share priceCurrent share price Net Asset Value (NAV) Net Asset Value (NAV) P/NAV = NAV = 100 cps100 cps 32.4 cps 32.4 cps P/NAV = 3.1 times P/NAV = 3.1 times

Page 95: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Profitability Ratios (ROE)Profitability Ratios (ROE)

ROE = ROE = Profits attributable to ordinary shareholdersProfits attributable to ordinary shareholders Ordinary shareholder’s funds Ordinary shareholder’s funds

ROE = ROE = R66 000 000 x 100%R66 000 000 x 100% 276 000 000 276 000 000

ROE = 23.91%ROE = 23.91%

ROE = ROE = EPSEPS Opening Net Asset Value (NAV) Opening Net Asset Value (NAV)

ROE = ROE = 7.4 cents x 100%7.4 cents x 100% 28.8 cents 28.8 cents

ROE = 25.69%ROE = 25.69%

Page 96: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Debt / Equity RatiosDebt / Equity Ratios

Debt / Equity = Debt / Equity = (LT + ST interest bearing debt) - (Cash + Bank) (LT + ST interest bearing debt) - (Cash + Bank) Total Shareholder’s funds Total Shareholder’s funds

Debt / Equity = Debt / Equity = (R115 000 000 + R43 000 000) - R14 000 000(R115 000 000 + R43 000 000) - R14 000 000 R288 000 000 R288 000 000

Debt / Equity = Debt / Equity = R158 000 000 - R14 000 000R158 000 000 - R14 000 000 R288 000 000 R288 000 000

Debt / Equity = Debt / Equity = R144 000 000R144 000 000 R288 000 000 R288 000 000

Debt / Equity = 50Debt / Equity = 50

Page 97: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Interest CoverInterest Cover

Interest Cover = Interest Cover = Earnings before interest & tax (EBIT)Earnings before interest & tax (EBIT) Net interest paid Net interest paid

= = R115 000 000R115 000 000 R20 000 000 R20 000 000

= 5.75 times= 5.75 times

• One of the most important ratios to consider financial riskOne of the most important ratios to consider financial risk

• A three times cover means sufficient profits to pay the current interest charge three times - manageable

• This is normally the minimum cover required - below this level, we would rarely contemplate an investment!

Page 98: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Cash Flow from Operating ActivitiesCash Flow from Operating Activities

Operating Profit before tax & interestOperating Profit before tax & interestDepreciationDepreciationAmortisationAmortisationProvisionsProvisionsInterest PaidInterest PaidTaxation PaidTaxation PaidChanges in working capital (Debtors, Changes in working capital (Debtors, Creditors, Inventory, etc.)Creditors, Inventory, etc.)Net Cash provided by operating activitiesNet Cash provided by operating activities

2011 20102011 2010RM RMRM RM 68 5668 5614 13 14 13 1212 22 2 22 2 (3) (2)(3) (2)(20)(20) (15)(15)(21)(21) (12)(12)

5858 4444

Cash Flow StatementCash Flow Statement

To compare this figure with EPS, subtract capital expenditure to maintainTo compare this figure with EPS, subtract capital expenditure to maintainoperations. Not always readily available – so subtract operations. Not always readily available – so subtract depreciation. depreciation.

Financial Statements Financial Statements

Page 99: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Cash Flow from Operating ActivitiesCash Flow from Operating Activities

Net Cash provided by operating activitiesNet Cash provided by operating activitiesDepreciationDepreciationAdjusted cash provided by operating Adjusted cash provided by operating activitiesactivitiesCash Flow per ShareCash Flow per ShareEPSEPSCash Flow / EPSCash Flow / EPS

20112011 2010 2010RM RMRM RM 58 4458 44 (14) (13) (14) (13) 44 3144 31 5.18 3.645.18 3.647.4 7.37.4 7.30.69 0.500.69 0.50

Cash Flow Statement

Any ratio above 0.75 can be considered very good.Any ratio above 0.75 can be considered very good.

Any ratio consistently below 0.50 should be questioned. If a companyAny ratio consistently below 0.50 should be questioned. If a company cannot convert its profits into cash then something is wrong! cannot convert its profits into cash then something is wrong!

Financial Statements Financial Statements

Page 100: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Company AnalysisCompany Analysis

Page 101: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Research: Company AnalysisResearch: Company Analysis

Page 102: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Company AnalysisCompany Analysis

UndervaluedUndervalued

UndervaluedUndervalued

UndervaluedUndervalued

Manageable Manageable FinancialFinancial

RiskRisk

ProfitableProfitable

Page 103: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Big Picture – Economy (GDP growth) – Inflation & Interest Rates

• Company Analysis:– EPS Growth & Turnover Growth > 10%– Valuation:

• Price/NAV < 2 / PEG > 35 and < 75 (Undervalued)

– Profitable:• ROE > 15%

– Manageable Financial Risk• Interest Cover > 3 times

– Cash Flow• Cash /EPS > 0.75

Summary: Fundamental BenchmarksSummary: Fundamental Benchmarks

Page 104: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Investment StrategiesInvestment Strategies

Page 105: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Watch ListsWatch Lists

Page 106: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

View Watch List as “Investor”View Watch List as “Investor”

Page 107: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

““Rank” Watch List as InvestorRank” Watch List as Investor

Page 108: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Strategy: Value Investing

Page 109: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

“Price is what you pay, value is what you get”

Warren Buffet

Page 110: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Research Tools: Value FilterResearch Tools: Value Filter

Select Select DefaultDefault

Page 111: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Debt- free? Interest cover• Generating cash? Spending money

efficiently? Cash Flow / EPS• Turnover & earnings growth beating

inflation? • Gross profit, Operating profit & Net profit

margins growing? • Company well-positioned to beat

competitors? • Generating value for shareholders?

Quality (Safety)Quality (Safety)

Page 112: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Research Tools: Quality View Research Tools: Quality View

Select Select Share Share CodeCode

Page 113: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• If you had invested $10 000 at inception into Berkshire Hathaway in 1965 … your nest egg would be worth more than $50-million.

• Warren Buffet is a patient & cautious investor. • He ignored the tech-bubble entirely & still does not hold a

single technology or internet stock. • He likes shares he can “see” & “understand”• “It is much easier to predict the relative strength that Coke

will have in the soft drink world than Microsoft will in the software world”

• Buffet likes to know the companies intimately.• Holds onto them for the long term, or as long as they pass his

growth tests without becoming over-priced. • Advice: The key to success is to think of yourself

as part-owner of the business.

Successful Investor: Successful Investor: Warren Buffet

Page 114: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Value investing is the strategy of selecting shares that trade for less than their intrinsic values.

• Value investors actively seek shares of companies that they believe the market has undervalued.

• They believe the market overreacts to good & bad news, resulting in share price movements that do not correspond with the company's long-term fundamentals.

• The result is an opportunity for value investors to profit by buying when the price is deflated.

• Typically, value investors select shares with lower-than-average price-to-NAV or price-to-earnings (PE) ratios and/or high dividend yields.

Value InvestingValue Investing

Page 115: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• The big problem for value investing is estimating intrinsic value.– There is no "correct" intrinsic value. – Two investors can be given the exact same information & place

a different value on a company. – For this reason, another central concept to value investing is

that of "margin of safety". This just means that you buy at a big enough discount to allow some room for error in your estimation of value.

• The very definition of value investing is subjective. – Some value investors only look at present assets/earnings &

do not place any value on future growth. – Other value investors base strategies completely around the

estimation of future growth & cash flows. • Despite the different methodologies, it all comes

back to trying to buy something for less than it is worth.

Problems: Value Investing

Page 116: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Compared to charting, value investors have tons of financial documents to read. It is very labour-intensive.

• The value investor is often subject to management buy outs, or "going private" phenomenon.

• You have to wait for market forces to realise that the company is undervalued to move it up. You need loads of patience.

Problems: Value Investing Problems: Value Investing

Page 117: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Growth at a Reasonable Price (G.A.R.P.) Growth at a Reasonable Price (G.A.R.P.)

Peter LynchPeter Lynch

Page 118: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• He was in charge of Fidelity’s Magellan Fund between 1977 – 1990.– Posted an average annual return of 29%. – No fund manager has ever run a fund of its size

($14-billion) so successfully for such a long time.

• Attributes success to the skill of finding investment opportunities in areas you are already familiar with.

• Looked closely at stocks for which he & his family had “positive personal experiences as consumers”

• Looked for the simplest of businesses to invest in …

Successful Investor: Peter LynchSuccessful Investor: Peter Lynch

Page 119: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

“Go for a business that any idiot can run, because, sooner or later, any idiot probably is going to run it.” Peter Lynch

Successful Investor: Peter LynchSuccessful Investor: Peter Lynch

Page 120: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• His book was published in 1989 has the same relevance today.– Introduced the Holy Grail of investing …

the “Ten Bagger”– Make 10-times your money within 5-years

Successful Investor: Peter LynchSuccessful Investor: Peter Lynch

Page 121: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Peter Lynch, pioneered a hybrid of growth & value investing with what is now commonly referred to as a "growth at a reasonable price (GARP)" strategy.

• Another acronym SWAN – Sleep Well At Night

• GARP combines the two successful strategies of value & growth investing– Value investors look for relatively cheap shares

compared to their earnings & NAV– Growth investors look for companies that will grow

faster than others

Growth at a Reasonable PriceGrowth at a Reasonable Price

Page 122: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• GARP investors do not look for companies in trouble or drastically undervalued, nor do they look for high-flying growth shares– Stop short of investigating the

companies’ business in great detail– More concerned with historical growth &

stock price than qualitative factors– Seek growth from:

• The firm itself (Organic Growth)• Headline Earnings growth (HEPS

Growth % > 15)• PEG ratio < 100

Growth at a Reasonable PriceGrowth at a Reasonable Price

Page 123: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Filter: GARPFilter: GARP

Select Default

Page 124: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• GARP might sound like the perfect strategy (S.W.A.N.).– Being greedy for both growth & value is

not easy.– If not mastered, you could buy mediocre

shares rather than good GARPs.

Problems: GARPProblems: GARP

Page 125: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Strategy: Investing for DividendsStrategy: Investing for Dividends

Page 126: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Most straightforward share selection strategy

• Pick investments that provide a steady stream of income every month, quarter or year

• Combination of ordinary shares, bonds or preference shares that pay regular & substantial dividends

• Assess older, more established firms that have a very predictable earnings stream

Investing for DividendsInvesting for Dividends

Page 127: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Investing for DividendsInvesting for Dividends

Dividend Yield = Dividend/ Price x 100%Dividend Yield = Dividend/ Price x 100%= 6c / 100c = 6c / 100c

Dividend Yield = 6% Dividend Yield = 6%

Ave. Dividend Yield = 2.4%Ave. Dividend Yield = 2.4%Dividend investors want 5%+ Dividend investors want 5%+

Page 128: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• On R1-million investment, this would produce R50 000 – R60 000 in income, tax free

• Do not invest on the basis of dividends alone - high dividends do not mean that it is a good company

• Dividends are paid out of net income– Lower retained earnings (Future growth?)– Large dividends would be better spent invested

in the company.

Investing for DividendsInvesting for Dividends

Page 129: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Value of original investment can drop.• Dividend distribution & level of payouts are not

guaranteed with shares as with bonds.• Should the company experience financial hardship

or a great investment opportunity comes along that requires significant cash outlay.

• Investigate company fundamentals & not do not just look at dividend yield.

• Income investing is not perfect.– Maintain a well-diversified portfolio.

Risks: Investing for DividendsRisks: Investing for Dividends

Page 130: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Filter: Dividends Filter: Dividends

Select Default

Page 131: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

RecommendationsRecommendations

Large CapsLarge Caps

Investing for Dividends

BFA ConsensusBFA ConsensusBuy Recommendations Buy Recommendations

Undervalued, Undervalued, Quality SharesQuality Shares

IFR DailyIFR DailyRecommendationsRecommendations

Small CapsSmall Caps

Page 132: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

Investment StrategiesInvestment Strategies

Value InvestingValue Investing Objective: Defensive investment in bear marketObjective: Defensive investment in bear market

Growth at a Reasonable Price (GARP)Growth at a Reasonable Price (GARP)Objective: Look for undervalued & high growth potential stocks Objective: Look for undervalued & high growth potential stocks

(Bull Market)(Bull Market)

Investing for Dividends Investing for Dividends Objective: Assess older, more established companies for regular Objective: Assess older, more established companies for regular

& substantial dividends & substantial dividends

Page 133: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

• Develop your own style of investing– Match investment strategy to your

personality• “It is far better to buy a fine company at a

fair price, than a fair company at a fine price.”

• Decided, based on fundamental analysis a share is a good investment …

• The next question is … when to buy?

Conclusion: Investing Conclusion: Investing

Page 134: Shaun van den Berg Head of Client Education at PSG Online Welcome to Marketworx: Centurion Tuesday, 24 July 2012

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