Need A Good Broker for All The Cheap stocks out There? Try St. George’s Directshares.
Warren Buffet thinks that stocks all over the world are attractively priced right now. He seems to have an awful lot of confidence in US equities and is putting his money where his mouth is. In fact I would have to agree with him and my own personal view is they do seem cheap to me. But just after I bought some equities at the beginning of November, world equity markets went into free fall and I found myself having to return time and again to Mr. Buffet’s op-ed piece in the New York Times for comfort, when the pain it seemed, was just too much to bare.
If you can stomach a roller coaster in the short and medium term, then it’s worth thinking about a punt. Perhaps the easiest way I can think of buying Australian stocks is through an online broker like St George’s directshares. They are my broker of choice, just because it was so easy to set up an account with them, If you already have a Power Saver bank account with St George like I did, then setting up a St. George’s directshares trading account is a complete doddle. Here is my logic though, and in large part I have plagiarised from the Sage of Omaha, because he is the world’s greatest investor and I am sure he uses a St. George’s directshares trading account when he buys a few billion dollars of equities!!!
The ASX has been correcting for the last 9 months almost solidly. Just like every other equity market in every other country in the world has. In fact year to date has been pretty grim, if you first bought into the market in January when the ASX hit a high of 6691. The Index has since climbed down from its highs and dropped over 2500 points this year, with a loss of about 40%. I feel the pain of anyone who made that trade.
One doesn’t need to be reminded just how bad the news is, everyone has suffered to some degree. The credit crisis story, well it’s getting very old pretty quickly. The crisis first started a couple of years ago with HSBC declaring a profits warning, which it never does, and then it kicked into overdrive about 14 months ago when two Bear Stearns hedge funds began imploding, and markets have been unwinding ever since. Frankly I am a little bored with the whole theme.
When a market corrects 40-50% in the space of a couple months does that mean that the companies that form the index are now half as valuable as they were a year ago? Have things changed so much, that profits, revenues and growth prospects are all going to be half what they were a year before? That seems rather unlikely to me.
NAB reported full year earnings at the end of last month and it has seen a drop of some 11% for the year, CBA reported just a couple of weeks ago and posted a 12% gain in its yearly profits, though both are cautious about future performance. Now obviously equities price in the future profits. But one has to wonder whether it is fear that is driving the markets rather than the fundamental notion that future profits should drive equity prices and their valuations.
The point being made is this. These kind of sell off’s in equities, well they are once in a lifetime opportunities you see. Opportunities to buy shares in solid companies at decent valuations. Forget about mutual funds and diversifying your risk for the moment, or all of the other malarky that people usually talk about when investing. Those rules do not apply in troubled times such as these. Everything has corrected simultaneously.
In this kind of situation investing is a lot more basic than the principles of correlation coefficients, standard deviations and individual stock beta’s. Statistical analysis of historical returns, well they go out the window in times like these, and in fact that is a large reason why people have been so badly burned. The models sophisticated investors were using became useless when the markets were at their most stressed. Historical returns were not able to accurately model what actually occurred in financial markets during the months of September and October 2008
The story now is the most simple it will ever be, Mr. Buffet in my view has it down. Be fearful when everyone is greedy he says, and be greedy when everyone is fearful, and I couldn’t agree with him more. It will never get easier than this. Though stocks may indeed become cheaper in the short run, there are going to be companies with great prospects in spite of an impending recession, companies that have been oversold, there just are, because everyone is selling everything at the same time right now, or were at the start of last week anyway. If that is the case, then obviously there are some good buys out there, provided you’re willing to wager for the long haul and for the long haul only.
So what I am saying is this, pick a few blue chip companies, companies whose business you understand and know, and if you are prepared to stay invested for a 3-5 year period, if the company is a great one, it’s hard to see how you could lose. To rephrase what I am saying, it’s very hard to see the price of stocks of solid companies with strong business models, in 3-5 years being lower than they are today.
With that kind of horizon I am very comfortable buying. Once you have bought though, expect that the value of shares may go down even further, they did when I bought them at the start of the month, then bounced for a few days and have since sold off again, and its been a wild ride to say the least. If you choose the right stock, then no matter what price you buy it at, and what happens in between, if you hold it at least 3-5 years, I am willing to wager money that the price in 5 years will be far higher than the current price you bought it at today, it’s that simple.
Why am I so confident, a couple of reasons, for a start, when people look back in time, when they look at the peak of the last equity market bull run, at the start of the year when the ASX was peaking above 6000 and the Dow Jones industrial Average was almost hitting 1400, I doubt very few people will describe it as being bubble valuations. Yes there was a bubble occurring at the time, but it wasn’t in equity markets, it was a credit and housing bubble, not an equities bubble, like we saw on the Nikkei during the 80’s or on the Nasdaq at the start of the decade. In fact if you look at any of the indexes mentioned other than Japan and exclude this decade and take a 10 year view, anyone who was long, made a fortune, as Mr. Buffet will attest.
Perhaps equity valuations did need to correct, but for most of this decade, they have been driven by rising corporate profits. Though there may have been some air in the price, it was easily deflated; we were riding a bull that did actually have some strong legs.
The second reason I think stocks are a good punt, is that even blue chip companies have been oversold in the current climate, and you only ever get one chance in every generation to pick up blue chip companies on the cheap. It just doesn’t happen otherwise, if ever. Ask Mr. Buffet he has built the world’s largest investment fortune on that very premise.
They are called blue chip for a couple of reasons. The first is their ability to deliver profits in difficult environments due to their market leading status in whatever industry they dominate, suggesting that these counters are royalty hence the term “Blue Chip”. Secondly, technically a blue chip should have a diversified earnings base, and to own a company that makes money in multiple ways and does so successfully is always going to cost a lot of money. When times are normal that is, but they are not normal, and now blue chip stocks are cheap.
I am not actually trying to give out investment advice here, I don’t expect anyone to actually listen to what I have to say and then act purely based on what I have said. People need to do what makes them feel comfortable. These are my views, people can listen to what I have to say and take away what they want to take away from it by all means, but they do need to make up their own minds. The trade I am looking at for myself is as follows.
If you look at BHP Billiton for example (Australian royalty if you ask me), it traded at a high of nearly A$50 back in May, you can now pick up the same integrated commodity producer for half the price at about A$ 25 (its price has since climbed from the time this article was first written). BHP in any cycle is always going to be a leader. Sure commodity prices have fallen, and remain low, but so has the price of the stock. We all know that the Chinese economy is growing at torrid pace is and is set to do so for the next 2 decades at least, even with a contraction in America and a global recession. Of course there is going to be a slowdown in Chinese growth as America and the rest of the world falls into a recession, but that is going to affect the Chinese mildly in my view. Worst case scenario, it grows half as fast as it usually does so in its worst years, 5%-6% a year (in reality the common view is that if it doesn’t hit 7% growth, then there will be social unrest in China so great, that regime change would occur).
A 50% reduction in the price of BHP more than reflects a slowdown, it reflects outright fear, and when people are afraid, I personally am willing to take their shares at what I view as being a cheap price off their hands and hold them for a few years. I have the stomach however, to watch those shares go up and down in between, but what is clear is that I am pretty comfortable in the fact that I will be buying BHP on the cheap and that its price in 5 years from today will be higher than it is now. I absolutely believe that beyond a shadow of a doubt.
What the best way to buy shares if you think they are cheap like I do. Well there are a few ways, but for people wanting to get their toes wet for the first time, an online trading account is probably the easiest option and there are a few online brokers around. So rather than talk about lots of different brokers I’ll let you know how my broker works.
St Georges directshares is probably the best way to get your toes wet without any obligation. It’s free to join, so if you decide you don’t want to play, you can walk away and you don’t have to pay. The only time there is a charge is when you trade. If you have a bank account with St George you are half way there already and it’s a case of simply linking your directshares account with your bank account.
If you don’t have a bank account with St George, then personally what I did was to set up a Power Saver account with them first, because I prefer consolidating my banking, especially my savings and Investments. The thing with St Georges directshares is the first 25 trades are free, so getting in and buying the companies that you like the most, will cost nothing in transaction fees. If afterwards you feel you want to get more sophisticated and start trading equities, then there is a charge after you have exceed your first 25 trades.
St George’s directshares charges at most $32.95 per trade including GST. If your trade amount exceeds $30,000 then trading commissions amount to 0.11%. The one thing I do want to keep saying is, that even though I see this as a great time to buy, I have a horizon, if you get bitten by the bug and want to start trading in and out of positions regularly, then do be careful.
St George’s directshares gives you the ability to purchase Shares, Options, Warrants, Managed funds, Exchange Traded Funds, and Structured Products. All of which you should understand before you even think about getting your feet wet and trying them out. They also provide margin financing which means you can borrow from your broker in order to buy shares, though that is not for the faint hearted. If you need these products explained or have any interest send an email to the site and we will explain it for you.
>> Click here to sign up for St.George Direct Shares
The customer service is excellent. St George’s directshares platform itself, is dead simple to you use, it allows you to consolidate all your linked accounts and run it from a single administration point.
There are customizable real time tickers, interactive charting and all the other bells and whistles that you would expect from an internet trading application. You can track your order, see where it has entered the queue, and view the status of all your orders. It’s a pretty comprehensive trading platform.
Most importantly if you haven’t got the stomach for the way the markets are gyrating, and you want to get out at a level where the loss is manageable you can set a stop loss. That is you can define an exit price before you even buy the stock, and should the price decline to that level you can exit and limit your damage.
The main thing that one has to remember though, when making an investment, is one needs to have reasonable investment horizon. If you think that stocks are cheap right now and you can make a fortune in six months by betting on price movements, walk away or play another game.
Blue chips are cheap right now, that is the point of this piece in one sentence. In fact in my opinion we only see corrections in across the board prices like this, once every generation, if that. I think over a 5 year horizon any blue chip will be worth a lot more then than it is now. So if you think you may agree with my view, pick something you like find yourself a broker, one you can begin with anyway, and have a go, but do be sure to expect a wild ride in between. I have to say it because there is no getting away from it, but the price of stocks, they go down just as fast as they go up. If you buy sensibly though and have patience for the upside however you will be rewarded.
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