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Managing a Share Portfolio

Almost invariably. . There are any number of books and systems that purport to show the road to quick and easy riches. not about using the Share Market as a Casino.This report is about investing directly in Australian shares for profit. the riches flow only to the promoters.

more will be invested in large companies than small companies because that is how the index works. that the market can be beaten . This Report focuses on the five basic principles used by investors serious about managing and growing their wealth. Using Fund Managers Using fund managers can be a good approach to share investment but management expenses can be high. For larger investors. • Buy shares in good. In the main this report is about investing in your own portfolio rather than in the market overall or by using fund managers.and be happy to sell if the stock becomes expensive. investors are invariably buying into a pre-existing Capital Gains Tax liability. It would be a miracle if the returns received over short or long periods were the happy to wait . where the market is not as large. • Why planning to be wrong is an important part of being a seriously successful investor. • The importance of understanding and applying basic principles to recognise when shares in good companies are reasonably priced.but it is not easy. Also. those who were overexposed to property investments also would have seen their portfolio performance lag. . although.manage your risk. The risk when investing in your own portfolio is higher than when investing in the index or through most managed funds. There is no attempt to favour one company or type of company over another.not companies . Supporters of this theory believe that the market is almost always right and that it is impossible to do better and very costly to try. When buying into a managed fund. • Don’t expect to get rich quickly but don’t be surprised if you do. the better the help you need.and significant changes in personnel are rarely reported to investors. diverse and well informed as some international markets. from popular books aimed at the general public to academic tomes written by Doctors of Philosophy. Investing in the index is a legitimate approach. Sometimes this Capital Gain is crystallised soon after investment and a portion of the investor’s capital is paid back in the form of taxable income. Managed Funds or Investing in the Index. by definition. The Lessons of Experience and Research The continuing lesson from examining how the great names in investment and fund management have been consistently so successful over decades of often great industrial. Investors who don’t obey the basic rules or are driven by greed into speculation can be very badly damaged. money tends to be managed by people . Special Points of Interest • Analysis of almost seven decades of Australian share market performance shows average per annum performance of around 11%. • Plan on being wrong sometimes . Many who played the market with technology stocks found their portfolios down by more than 80%. And being disciplined to sell when those shares become expensive. Many investors spread their investment across too many fund managers and can end up paying dearly for an average return. (Ask investors in HIH or Babcock & Brown). The investment is in the broad economy as represented by the major businesses listed on the share market. Investing in the Index There are investment funds that aim to almost exactly replicate the performance of the share market index. Employing any of these approaches is far better than not investing. Recently this theory has been seriously challenged both on a theoretical basis and after new. all to confirm what is really obvious. Personal Funds Management for Profit Your Own Portfolio. Statistics have been poked and prodded. In the late 2000’s. the Australian share market. Over time. diversification and time in the share market.1 Investing for Profit in Australian Shares Thousands of books and millions of pages have been written about investing in shares. ideas espoused and debunked. This is a far worse performance than an investment in the broad market index could ever return just because of the increased diversity it provides. There is also ample evidence in Australia. There is little or no management involved in this type of investment and the costs are very low. perhaps the major problem with using managed funds is the lack of control over the level and nature of the income received and the tax implications of decisions taken by managers. This confirms the importance of patience. investment grade companies. Investing in Your Own Portfolio Buying shares is different to investing in the market index – by definition. financial and economic change is their disciplined approach using five basic principals. as represented by the index has been a very good investment. • Work hard and hire good help – the less work you want to do. Often a combination of approaches should provide a better quality result. Efficient Market Theory says that the market is always well informed in setting the price of individual stocks. Individual companies can go out of business and all of the money can be lost. long term analysis of share market data from the United States. • Try not to pay too much .

the opportunity to get a better after-tax result by managing income and capital gains more efficiently.2 Managing your own share portfolio also requires more administration than using index funds or fund managers. including periods of war. This is a very large series of data. The rewards are in having more control over investments. information technology and healthcare are the significant parts of the economy.the people you lend it to may not pay it back. through industrial restructuring to the present where mining. Chart 1 also tells us why people shouldn’t put all their money into the Share Market. you will receive interest. the chart includes a line showing the returns for investments made in September 1936. There is. Over this period the average return for long-term investors has been 11% per year. The message is that if you want to spend the money within the next four years and you want to be 90% certain that it is going to be there. received by people who invested in Australian shares over a period of sixty years. or • You can choose to lend money to others like banks and other financial institutions or through mortgages. The returns can be negative. from capital growth and dividends. telecommunications. of course. Based on today’s tax laws the after tax return from shares would have been around double the return from money in mortgages or at the bank. And the return from shares is more favourably taxed with the dividend income mostly in the form of franked dividends where 30% tax has already been paid and tax is only paid on only half of capital gains. Had these investors kept their money in loans to others (eg in the bank) they would have made less than 7% per year. But the negative return from the share market goes away with time – and after ten years all index investors in the past have at least had their money back. two years – all the way up to 20 years. booms and recessions as well as a period of substantial structural change. Chart 1 . December 1936. In other words. Why Invest in Shares People with money have two major alternatives: You can choose to invest in assets like shares and properties. then don’t invest it in the share market – keep it in the bank or in some form of term deposit. March 1937 and each quarter after that. During this period Australia moved from being a rural and colonial economy. There is a separate line for each quarter over that period. to becoming one of world’s great mineral exporters. By being a part-owner. you receive a share of the earnings and capital growth.Rewards from Long Term Investing Source: Prescott Securities Ltd. financial services. • Chart 1 shows the returns. . The chart shows all the rates of return they experienced after one year. and the interest there is in the investment process. also risk in lending money . through the growth of protected manufacturing industry in the 1950s and 1960’s. By lending your money rather than investing it. These rewards have some costs in time and involvement. This area of discussion is called Asset Allocation and is more fully explored in other reports from Prescott Securities. In fact. a lot of money has been lost over the last ten years due to the failure of mortgage intermediaries through either bad management or fraud.

0 6 14.0 14 8. the end of June 1967. And by the end of the third year the portfolio was back into profit. After seven years they had experienced compound returns of around 16% per annum. The amount of profit a company earns can be divided amongst all of the shares to calculate the Earnings Per Share. Share Prices and Inflation Chart 2 . a great first year does not mean you will always be a top performing investor. over quite a long time period there has been an inverse relationship between PE Ratios and the Rate of Inflation. The red line shows the return for investors at one of the great investment dates of the last Century.0 18 4. The message is that when investing in the index or managed funds it is the time in the market that matters. The price of shares will be lower than at times when interest rates are low. just prior to the oil crisis.0 12 10. After one year the portfolio value was 73% higher than at the start. it didn’t continue. the year from September 1974 was pretty good and most of the loss was recovered. And unfortunately. This was the worst time to invest in the last sixty years (worse than September 1987) and the portfolio would have lost almost 45% of its value over the next twelve months. Consequently. The economy was running strongly after the slow down in the early 1960’s.0 22 20 2. not the timing of the market.0 2 18.0 4 16.0 16 6. If the amount earned per share increases over time then the value of the share to investors will increase over time.0 Inflation (Inverted) (LHS) Price/Earnings Ratio (RHS) 24 0. This relationship led to a drop in the attractiveness of shares in the early 1970’s as inflation went up to quite high levels. Seven years later these investors also hit the oil crisis that brought their performance back to the pack. When interest rates are high it is more attractive to keep money in safe loans rather than be subjected to the risks of investing. The level of interest rates is largely influenced by the rate of inflation. Investors have long used the ratio of Price per Share/ Earnings per Share (the PE Ratio) as an indication of whether a share is cheap or expensive. long term levels. The blue line in Chart 1 shows the returns experienced by those who invested at the end of September 1973. Unfortunately. as shown in Chart 2. The amount that investors are prepared to pay for shares seems to be influenced by two key factors: • The level of interest rates (ie what they can earn by not investing in shares). There was a return to higher levels of pricing through the 1990’s as inflation fell to more normal.0 0 Source: Iress & RBA Year Price/Earnings Ratio Inflation . inflation and interest rates were low and the future looked terrific.Share Prices and Inflation -2. Why Do Shares Go Up in Value (or When Will the Music Stop?) The more profit a company earns the more valuable it is.0 10 8 12. What is also important is the amount that investors are prepared to pay for earnings. Fortunately. and • Sentiment. These investors later participated in the strong market returns of the late 1970’s.3 The good news from Chart 1 is that having a bad year in the first year does not mean that you are destined to do poorly from investing in shares.

the maths is fairly simple but like all good theories when it comes to investing. If your eyes are starting to glaze over at this point. Comparing Likely Returns from Different Share Investments The theory is that the true value of a share is the discounted present value of all cash flows that will flow from that investment in the future. Long Term Investors will do best if they buy shares in good quality companies when sentiment is poor and hold the stock until sentiment improves. The theory points us to what is important. At Prescott Securities we use an average of the yield for the past twelve months and the consensus estimates for the next two years. If prices have been increasing then investors will feel confident about investing in shares. Prices will keep rising until they reach an unsustainable level. If a stock becomes very popular it sometimes makes sense to sell and move to another investment. We also use the pre-tax value of the dividend by “grossing up” to allow for the level of Franking (ie the level of tax already paid by the company). The question is whether the historic data is good enough or whether the process can be improved by using research? Historic data will tell you the results a business has achieved under past management . plus a premium for risk. Peter Lynch. The raw historic information is readily available and you will always know the current price. This is the foundation of most day trading and works well until the music stops. This way you can determine the true value of a share. the estimates would need to be discounted by the current risk free return you might get. you would need to know the level of Earnings Growth. don’t lose heart. say from a cash management trust. Unless something changes this is a pretty good indication of what will happen in the future. Earnings Growth and the Price/Earnings Ratio we know we are evaluating shares based on the basic components of success. you could then reduce all of these amounts to a current value. Another approach to using this data is to create a ‘Value Score’ for each share based on the equation below which was used by the famous US investor. To do this. At Prescott Securities we believe it is possible to improve on the historic data and the information we use is outlined below. This seems like a reasonable proposition. Value Score = Dividend Yield + Earnings Growth Price/Earnings Ratio What this equation is saying is that shares with a high dividend yield and/or high earnings growth that are selling at a low price are more attractive to buy than other shares. When share prices are falling. The Dividend Yield The yield for the past twelve months is in the newspaper everyday and while analyst projections are available from any broker or research house. In reality. confidence will be lower and prices will continue to fall until the underlying value becomes so attractive as to cause a turn in pricing. . the risk involved in using historic information is quite low. Companies will strive to at least maintain their dividend payments to shareholders – the management like to keep their jobs. You must recognise the fundamental quality of a company and also have a way of knowing when the shares are reasonably priced. In order to make some judgement about the future price of a share you would need to decide whether the current Price/Earnings Ratio (PE) would be maintained in the future and you would certainly need to know what it is now. Earnings Growth and the current PE. The experience of traders in technology stocks during 2000 bears witness to this. This can be a lucrative but dangerous style of investing and critics often call it the “Greater Fool Theory”.very valuable information. Riding the wave of investor sentiment is called “Momentum Investing”. The “Greater Fool Theory” is that it is OK to pay a high price for a share that is rising in price because there is always a greater fool who will pay you more. It is then a simple matter of comparing the true value to the price and then only buying shares when they are cheap. With the basic components of Dividend Yield. it is not the answer but the idea that is the key. This means that if you could estimate the dividends you will receive from a share each year in the future for a very long time and the price at which you will eventually sell it. Getting the Information In choosing to focus on the Yield. If you wanted to estimate future cash flows you would start with the Dividend Yield and in order to estimate the future dividends and the direction of the share price. To do this successfully is hard work.4 The two factors that seem to drive sentiment surrounding an individual share or the market as a whole are price movements in the recent past and the level of confidence in the future. you have all the building blocks that would be necessary to calculate the value of a share based on the net present value of all future cash flows.

. The problem is in getting a handle on what earnings growth is .00 0 150 Earnings/Dividends .00 Price 30 $3. One approach is to average the earnings growth over the past two or three years. then you would pay more for the shares in Company B. Company A has 2% per year of Earnings Growth and Company B has 12%.cents 0 Source: Prescott Securities Ltd.00 10 50 Earnings/Dividends . but we should take into account the conservative forward estimates – but acknowledge that they are only analyst projections and will change from time to time.00 100 $10.00 200 $25. consistency of earnings performance is an important indicator of the quality of the investment.00 20 $2. Iress & Morningstar Source: Prescott Securities Ltd.5% -1.00 $5.the information is not readily available and is difficult to interpret and define.4% 53. These are very different companies in many ways but there is also a difference in the consistency of the earnings growth. Its long-term earnings growth will give you information about a company focussed mainly on coal mining.cents $6.00 40 $4. Companies can change. it is easier to take a position on earnings growth where the earnings of a company have been consistently growing than where the earnings have been erratic. Qantas Airways Limited Westpac Banking Corporation Price Momentum Earnings Trend Dividends Price Momentum Earnings Trend Dividends 250 $30. Earnings growth provides management with the ability to pay higher dividends.1% 11. Table 1 Average Earnings Growth Past Two Years Forward Estimates Long Term Trend Medium Term Trend Westpac 10. The last two data points are consensus forward estimates.00 $1. Long-term earnings growth is not the entire answer either.4% 11.00 $0. The acquisition of Coles in November 2007 was a company changing acquisition and the core earnings of the business now has a focus on supermarkets. Below are earnings per share charts prepared in October 2010 for two companies.. If a company has been averaging 5% earnings growth over ten years and the projected earnings growth is greatly different (either higher or lower). For many investors. Iress & Morningstar . The recent earnings recovery cannot be ignored. There is an argument for considering the long-term earnings growth of a company as well as projections. you would want to understand what was going to make the future different. A good example is Wesfarmers. some level of judgement is required. Clearly.2% 10.00 $0. It seems obvious that if you have two companies that pay 7c per year per share in dividends. Table 1 indicates the differences in average earnings growth rate for these two companies over various time frames. A substantial management shake up can also change the direction of earnings.8% 5.2% Qantas -10. Perhaps a figure of 6-8% could be used.00 50 $5. The problem with looking only at forward estimates is that on average they are more positive than historical growth. Earnings Per Share history is available from some research houses and commercial information sites. The level of earnings growth will vary based on the method used for calculation. Some investors believe that earnings growth is the most important focus because it is likely that you will make more from a rapidly increasing share price than from dividends. Most research houses and broking firms will provide earnings projections and the average of each future year’s earnings growth could easily be calculated.00 Price $15. given the long-term consistency an earnings growth estimate of 10-12% would seem reasonable. competing with the likes of Woolworths.3% For Westpac. As it happens this would be a far more sophisticated use of broker research than taking notice of their Buy or Sell recommendations. you may choose to discount both the long and medium term trend figures as the past inconsistency reduces the predictive power of these figures. The majority of the information on these charts is historical (we are using the earnings figures before abnormals so that we can focus on the actual business performance). Westpac and Qantas. With Qantas.5 Determining Earnings Growth We know that if the level of earnings per share grows the value of the share should also grow over time. Finally.00 $20.

cents 150 0 Source: Prescott Securities Ltd.00 Price $15. if ever. On each of these criteria.9%. This does not diminish the validity of the overall process but merely indicates the difficulties in reducing everything to mathematics when it comes to investing. adjusted for consistency and the average of the last year’s growth along with future projections. By this measure. to act upon it would be speculative as a lot can happen in the meantime. It would be wrong to rely entirely on this analysis as many stocks have had well-deserved positive sentiment for a number of years and are worthy of consideration.3 times.00 $25.00 100 $10. the dividend yield was around 5.00 in May 2003 up to around $30. At the time.00 50 200 Earnings/Dividends .00 $5. we find that an average of the Long Term and Medium Term Trends.. If the new information will not affect profit for many years. Hard Research is Good to Find and Good Research is Hard to Find Research is rarely. about getting information that the rest of the world doesn’t have. the share compared favourably to the rest of the market. Relying on the PE based on the past year’s earnings is reasonably risky as next year the earnings could be considerably different and knowledgeable investors will often know when this may be the case.6 At Prescott Securities. then the Price line would be on top of the Earnings line. it would be foolish to spend much time trying to do basic analysis yourself. Increasing the attractiveness of the price when a company is trading below the long term PE and vice versa adds an element of contrarian thinking into the valuation model and this is attractive for many investors. Some investors may be happy to speculate (gamble) – but this is not serious investing. It is about calculating what impact new information will have on a company’s profit and when. Share analysts are clever and well-educated. The market noticed the quality of the stock and there was a strong price growth from around $18. we can see that ANZ Bank is a pretty good company. earnings growth has been extremely consistent and on average the analysts in August 2010 expected the consistent growth to continue. Current Price – The Price/Earnings Ratio (PE) Just as the yield based on last year’s dividend is readily available so is the PE where the current price is divided by last year’s reported earnings. Iress & Morningstar . generally provides a reasonable basis for calculation but occasionally judgement has to be used. And while some of them are not as good at it as others. compared to its long-term PE.00 $0. The chart below for ANZ Bank was prepared in October 2010. We also find it useful to consider how an individual share is trading. the earnings growth estimated at around 6% pa and the PE around 11.00 $20. ANZ Banking Group Price ANZ Banking Group Momentum Earnings Trend Dividends 250 $30. At Prescott Securities we use the average of the past year’s earnings and the consensus projections for the next two years earnings in arriving at our PE figure for each company. While earnings and dividend estimates are available most private investors opt for soft research options. They do nothing all day but evaluate information and become experts about the relatively small number of companies they specialise in. There are a number of things that are interesting to note from this chart. The long-term earnings versus monthly share price lines are organised such that if the PE of ANZ Bank had been the same over time. Since the early 1990’s.50 in April 2007 where it became rather expensive.

Finally. it makes good sense to take a position and let the world turn for a while without making changes. And be aware that good research is hard to find. You will know the purpose of good research is to add to your understanding about the earnings outlook for a firm. Also. And even when this is not the case. You will know that the availability of research defines the universe of shares you will be interested in – if there is no research you simply won’t have this share in your core portfolio. This does not mean only investing in “Blue Chips”. sometimes their analysts are not up to scratch. It will be sensible to sell some of the shares to come back to the top of your comfort zone. it is in the market and prices have already changed to reflect the impact the information is likely to have. Usually somewhere between 10-15 stocks is a good target where the benefits of diversification are not outweighed by the added complications. All investment grade companies will be researched and will have one of the following two characteristics preferably both. You don’t add much value by formally reviewing more Least Some of the Time Have a Portfolio Management Strategy This may include ensuring that the majority of your portfolio is considered “core”. Identify Investment Grade Stocks For your core portfolio it is sensible to identify the universe of investment grade stocks. They will have a significant retail franchise so that they have control over their own destiny and can be price makers rather than price takers. • They have a history of consistently increasing earnings per share. People who are serious about investing for profit in the share market should have a creed they recite whenever they are thinking about investing: • I will never know anything that everyone who can impact the share price doesn’t already know. The implication is that all big companies or only big companies are of investment quality and neither of these statements are true. you may want to say that no one share should be more than twice the average holding and that no share should be less than 25% of the average. Others will seek to add spice through small investments in less well-researched stocks or by allocating some money to specialist fund managers. Why Does this Approach Rarely Work? By the time the information is in the paper or magazine. • I am unlikely to buy something at the lowest price it will ever be. In fact. Once you have set a number. Individual share broking firms will have their own agendas.force yourself to decide what to sell.and being wise is easier. You will know that research is important because only dealing in historic information is dangerous. The research is actually paid for by large institutions and they understandably insist on there being an embargo period before this information is made public. Multiple sources of research are required. if they are doing work for a firm they are precluded from providing any information. Then keep an eye on them so that you can consider buying them when the price looks attractive. • I am more likely to make money by being wise than by being brilliant . establish a review process and time scale Formally reviewing your portfolio on a quarterly basis is sensible. Remember. • I am unlikely to sell anything at the highest price it will ever be. At Prescott Securities we subscribe to consensus data to get the average projections from all analysts. • Plan to be Wrong . Many people will be happy for all their portfolio to be “core”. . Once you know these things are true you are liberated to become a successful investor in the share market.7 They expect to gain an advantage by reading the paper. particularly if they have fund-raising or broking relationships with listed firms. Own more than one or a few shares . don’t increase it every time you want to buy something . We also draw qualitative information from various research houses. • I am not smarter than everyone else in the world. Establish exposure limits For example. Hard decision making is good for the soul and for the portfolio. Your core portfolio will consist of investment quality stocks and will be managed in a disciplined fashion. you are not trying to replicate the index: you are trying to do better so some level of risk is good. Where a share does so well that it moves significantly above the maximum exposure level you are effectively saying that you have moved outside of your comfort zone. the last people they will tell will be the general public or private client advisers. watching investment programmes on television or by subscribing to share magazines.but not too many The risk reduction benefit that comes from diversification is less with each share that you add to your portfolio. Even if researchers have important new information or analysis. Where you have a small holding you should either buy more or sell altogether and make way for something that you want to own. even if this meant something.

00 Price $10.8 Westpac (as shown earlier) fits into both categories.00 80 $16. The charts for Flight Centre and Fosters Group as examples (as at October 2010) are also shown on page 11.00 $6.00 $10.00 Price $10. Consumer Discretionary.00 $14. are also shown on page 11.00 Price $25.00 $4. the market is split into a large number of sectors – most of them very small and it is difficult to gain exposure without managing a very large portfolio. Popular wisdom would have you try to match your exposure to different sectors as closely as possible to their weighting in the index.cents $18. in this case Cochlear and Ramsay Health Care at October 2010.00 $12.00 50 40 30 20 10 0 Earnings/Dividends .00 0 50 100 150 $8.00 Earnings/Dividends .00 $0. Some companies may not have strong retail franchises but have exhibited long term consistent earnings growth. They are listed on page 11 along with their size in the Australian Market (as at October 2010).. This makes these sectors good “diversifyers”. Companies with Strong Retail Franchises and Consistent Growth in Earnings Per Share Woolworths Limited Price Momentum Earnings Trend Dividends Price Harvey Norman Holdings Limited Momentum Earnings Trend Dividends $45. excluding property trusts and utilities.00 45 40 35 30 25 20 15 10 5 0 Earnings/Dividends . Intuitively.00 $2.00 $6. such as Woolworths. Weighting the portfolio in line with the index really makes little sense. There are some companies that do not fit this definition of Investment Grade Stocks. Diversify As well as owning a number of shares it is a useful discipline to have exposure to different parts of the economy.cents Source: Prescott Securities Ltd.00 $35. These companies are worthy of consideration due to the strong brand position they have. there are nine categories.. as shown on page 11.. Iress & Morningstar Coca Cola Amatil Limited Price Momentum Earnings Trend Dividends Price Origin Energy Limited Momentum Earnings Trend Dividends $18. Judging risk based on the level of volatility of prices is a standard approach within the investment industry but for longer-term investors it is really nonsense. however.00 $0. Owning volatile assets is similar to a roller coaster ride .00 $20. If you buy at the wrong time then the quality of the businesses will usually at least deliver your money back at some point even though it may take a little while.00 $16.00 $40.00 $0. Iress & Morningstar Source: Prescott Securities Ltd.00 $8.00 $2. ANZ Bank (as shown on page 8) fits into this category.00 $8.00 60 $12.00 $1. Iress & Morningstar .00 $4. Coca-Cola and Origin Energy that have both characteristics are in a group of charts on page 10.00 70 $14.00 $2.00 $30. it does make sense to own different sorts of things.00 Price $5.00 $6. At Prescott Securities we have identified around 30 companies that we should be happy to have in a core portfolio at most times and especially when they are attractively priced.cents 200 $7. There are some companies that have strong retail franchises but have yet to exhibit consistent earnings growth.. Harvey Norman.00 $5. The international categories make more sense. Iress & Morningstar Source: Prescott Securities Ltd.00 $0.00 100 90 80 70 60 50 40 30 20 10 0 Source: Prescott Securities Ltd. Traditionally.cents Earnings/Dividends .if you don’t like the ups and downs you can cover your eyes (property investors have been doing this for years). Some of the other companies. The charts for some other such companies. These charts show earnings per share and prices over time (prepared in October 2010).00 $4. Information Technology (a very small sector) and Telecommunications seem to have marched to a slightly different drum over the past decade. The reward for owning volatile assets is a higher return.00 $15.00 $3. Investment Grade stocks have the capacity to forgive your errors.

00 $30..00 Price $2.50 $3.00 140 $25.00 Price $60.cents Earnings/Dividends .60 $1.80 $0.00 $0.00 $1.00 20 $0.00 12 $1.00 40 20 0 120 100 80 60 180 Earnings/Dividends .00 $7..50 $4.00 200 $40.00 $3.00 $10.00 $1.00 Price $2.00 $3.50 $0.00 $15.50 $3.20 Price $1.00 30 Earnings/Dividends .cents $2. Iress & Morningstar .00 $0.00 15 Price $2. Iress & Morningstar Companies without Strong Retail Franchises and Consistent Growth in Earnings Per Share Cochlear Limited Price Momentum Earnings Trend Dividends Price Ramsay Health Care Limited Momentum Earnings Trend Dividends $120..00 $80.00 Source: Prescott Securities Ltd.00 $0.50 $4.50 $2.00 $5.00 5 10 Earnings/Dividends .00 10 5 0 $5.40 $1.00 500 Earnings/Dividends .cents $4.50 $2. Iress & Morningstar Source: Prescott Securities Ltd.80 $1.00 $1..00 80 Price 60 40 $5.00 120 100 $15.cents 35 30 25 $3.00 $1.00 45 Earnings/Dividends ..50 $4..60 $0..50 0 $0.cents 160 Source: Prescott Securities Ltd.9 Companies with Strong Retail Franchises and Inconsistent Growth in Earnings Per Share Fosters Group Limited Price Momentum Earnings Trend Dividends Price Flight Centre Limited Momentum Earnings Trend Dividends 50 $8.00 15 $2. Iress & Morningstar Source: Prescott Securities Ltd.50 $0.40 $0.00 0 $0.20 4 2 0 8 6 10 25 20 15 10 5 $0.00 $0.00 Price $4..00 $6.50 $1. Iress & Morningstar Clarius Group Limited Price Momentum Earnings Trend Dividends Price Beach Energy Limited Momentum Earnings Trend Dividends $4.00 $100.50 Source: Prescott Securities Ltd.50 $2.00 $3.cents Earnings/Dividends .00 5 0 20 15 10 Earnings/Dividends .00 $0.cents 40 35 30 25 20 $35.00 100 0 Source: Prescott Securities Ltd.cents $20. Iress & Morningstar Source: Prescott Securities Ltd.00 Price $20.50 $1.00 20 $3. Iress & Morningstar Companies without Strong Retail Franchises or Consistent Growth in Earnings Per Share Australian Pharmaceutical Industries Price Momentum Earnings Trend Dividends Price TAP Oil Limited Momentum Earnings Trend Dividends $4. Iress & Morningstar Source: Prescott Securities Ltd.00 0 400 300 $10.00 $20.00 $0.50 $1.

PSL may receive a fee for advice and/or the implementation of an investment decision. you should obtain a copy of and consider the Product Disclosure Statement (where applicable) for that product before making any decision. end costs money. Financial Planning firms often have good process when it comes to structures. Level 1 Eastside 232 Robina Town Centre Drive. why not have a go . PSL. forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice by PSL. employees and agents disclaim all liability (whether in negligence or otherwise) for any error. 140 William Street. This publication does not take into account any person’s investment objectives. indicating that they may provide a solid conservative investment base. the good news is that there usually isn’t that much difference when all the costs are taken into consideration.6% 24. If your adviser only gets paid when you do something don’t be surprised if you are often advised to do something.9% 91. Don’t pay for advice by the transaction Sometimes the best advice is not to invest and you need to be prepared to pay for this advice too. Should you consider the acquisition of a particular financial product as a result of the material contained. fix up old cars or roast their own 80.5% 91. financial situation and particular needs. Serious investors know that good advice can add value. You don’t need a description of your portfolio. probably most importantly. There is a certain sense of satisfaction that comes from doing things for yourself. Pay your adviser a retainer.6% 6.8% 25. When the consequences of failure are low.3% -35. This publication is intended to provide background information only and does not purport to make any recommendation upon which you may reasonably rely without taking further advice. its Melbourne I Level 40.6% 0. might even save some money. ©Prescott Securities Limited December 2010.6% Consumer Staples and Financials seem to have lower volatility. Also. This is low value add.often with beaut graphs showing how your portfolio compares to the sectors of the I www.0% Correlation 34. turn a piece of wood in the shed. you need well-considered advice on what to do next.1% 23. conclusions. South Australia 5063 I T +61 8 8372 1300 I F +61 8 8373 1710 info@prescottsecurities.4% Volatility 25. .3% 16. All rights reserved.0% 3. Melbourne. Good advisers bring information.7% 80. asset allocation and the use of managed funds but generally get their share advice from stockbrokers where there is no advice process. By getting good advice you share this cost with other people.6% 11. Good advice eventually flows from having well considered and proven processes delivered by knowledgeable and experienced 38.8% 88. Except for any liability which by law cannot be excluded.5% 21. inaccuracy in. There are a few golden rules. it takes a lot of time and in the Prescott Securities have several other Reports available. Otherwise. Doing it Yourself – it Certainly is Cheaper (like brain surgery at home) Lots of things are cheaper if you do them yourself. PSL assume no obligation to update this document after it has been issued.3% 8. 228894 Head Office I 245 Fullarton Road. detachment to your decision making. PSL is a WHK Group firm.prescottsecurities. or omission from the information contained in this document or any loss or damage suffered by the recipient or any other person directly or indirectly through relying upon the information. Don’t pay for reports . as if it really matters. where the money involved is relatively small or where it really is just for fun. Queensland 4230 I T +61 7 5503 5600 I F +61 7 5503 5699 Sector Consumer Discretionary Consumer Staples Energy Financial Institutions Healthcare Industrial Companies Information Technology Materials (eg Resources) Telecommunications Share of Index Disclaimer: The information contained within this document was compiled by Prescott Securities Limited (PSL) based on materials from other sources and PSL provide no warranty regarding the accuracy or completeness of the information.0% 7. The purpose of this report is to show that investing professionally is not rocket science. Prescott Securities periodically produces reports on the investment sectors that seem to offer the most medium term potential.Prescott Securities Limited I ABN 12 096 919 603 I ASX Market Participant I Australian Financial Services Licence No. The bad news is that good advice usually costs more than bad advice (though not always).5% for advice Many firms will provide regular reports showing the value of your shares .prescottsecurities. Robina. This can be true of investing if the outcome doesn’t really matter. Victoria 3000 I T +61 3 9607 8571 I F +61 3 9607 8282 Gold Coast I Suite 105. experience and. Prescott Securities Limited (PSL) is the holder of an Australian Financial Services License No: 228894. Ensure that there is an advice process Stockbroking firms usually leave the advice to the adviser and often there is no controlling process.9% 91. you may choose to take a view that the prospects for some types of businesses are better than others at the moment and favour investment in those sectors. no-one would knit jumpers. Sometimes the result is not as good but often this doesn’t matter. All opinions.3% 25.1% 23.2% 32. Please visit our website www. and sometimes you will get some tax information. But investing with purpose is hard work. PSL and their representatives may have financial interests in some/any of the product(s) included within this report.