Transcript STEP1_Tutorial

As a novice investor, you are faced at first with what appears to be an over-whelming
array of choices when you look at the share price page in your daily business
newspaper.
There are over 400 shares listed on the JSE, in what we shall call the "Universe of
shares".
Your first objective is to create your own watch list.
You do this by narrowing your choice down to the top 25% of opportunities (i.e.
roughly 25 shares) on the share market by using the process of "prospecting".
(Note: PSG Online allows you to create three (3) watch lists with a maximum of thirty
(30) shares in each). It is suggested that you name the watch lists either:
• By strategy (i.e. Short term Speculative, medium term Swing Trading and long term
Buy and Hold),
• By industry (Resources and Mining, Financial and Industrial).
• We have stolen the idea of 'prospecting' for shares from the mining
industry.
• You goal is to find those companies that are "gold nuggets" and
avoid those companies which are called "dogs".
• To create your own watch list, start the prospecting process by
looking for shares that offer good potential (i.e. gold nuggets).
• Remember, that at this stage you are not doing any analysis on the
companies and therefore suggest that you make a 'Preliminary
Watch list‘ on paper of interesting-looking shares.
• There are four methods that you can start using to help you find
interesting-looking shares; They are:
1. The Top-Down Method;
2. Using the Financial Journalism Method;
3. The Technical Analysis Method; &
4. The Fundamental Analysis Method
Another way of looking at the Top
Down method is called the "General to
the Specific Method" or "Funnel
Approach".
There is a lot of information going into
the top of the funnel, but we apply
certain filter criteria so that only a
little bit of information comes out the
bottom of the funnel.
We start by looking at the "big picture“
and more specifically what is
happening on the International
Markets. At this stage, all you want to
do is look at the long-term trends in
all these markets.
Is the long-term trend moving up or down?
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It is suggested that you use the Wen Professional Plus charting software, to see what the trends are.
Examples of how to understand and research market trends are discussed below:
Ask Yourself: Is the long-term trend moving up or down?
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The US Markets - Start off by looking at the biggest economy in world, which is the American economy. When we talk about the
American economy and the US Markets, we talk about Wall Street and the New York Stock Exchange (NYSE). This is the biggest
stock exchange in the world, and has thousands of shares listed upon it. The most important group of shares that you want to
follow is called the Dow Jones Industrial average (DJ Industrial). This is the top 30 companies in America, which include
MacDonald, General Electric and Boeing. A broader cross-section of the US economy would be the Standard & Poor's 500 Index (SP
500).
The US economy is the gearbox of the global economy. If things are going well, it means that there is economic growth and jobs are
being created. People feel more secure as they have more disposable income and therefore feel more prosperous and they start
spending. This has a knock-on effect within the economy and eventually US companies have to expand to meet the demand and
even start importing from overseas!
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The Japanese Market - The second biggest economy in the world in Japan. The most important Japanese index to watch is called
the Nikkei Index. They have many problems with their financial markets, one being that their share market has been in a downward
trend (i.e. bearish trend) for nearly ten years. The economy relies heavily on exported goods, especially computers and motor
vehicles.
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The European Markets - The third biggest market in the world is the European Union and within that the German market, which is
called the DAX Index, while the French market is called the CAC 40 index. The most important European market for you to follow is
the UK market, especially the London Stock Exchange (LSE) and the Financial Times 100 (FTSE 100 Index). Many South African
shares, such as SAB Miller, Old Mutual, Anglo American and Sasol, are dual-listed (i.e. they are listed on the JSE and the LSE). More
importantly, the UK markets are one of our bigger trading partners. If the British economy is doing well, more South African
companies can export to them!
The next step is to formulate an opinion on what is happening within those different
markets as regards their economic indicators.
• Here we start looking at the affects of a higher oil price (i.e. Brent crude oil) on
inflation.
• What is the level of inflation in all those different markets?
• What is the current trend - up or down?
• Most western economies use interest rates as a mechanism to control the level
of inflation.
• What is the current trend with interest rates - up or down?
The next step is to look at the relationship between all the major currencies.
• What is happening with the US Dollar against the Japanese Yen or the US Dollar
against the Euro?
• Is the US Dollar becoming stronger or weaker?
• What are the implications or a stronger or weaker US Dollar?
• What is happening with the Rand against the US Dollar or against the Euro?
• What are the implications or a stronger or weaker Rand?
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Taking all of the above into consideration, you need to decide:
How does all this affect or impact on the local South African markets?
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First of all, look at the trend on the JSE All Share Index.
– What is the current trend on this market – up or down?
– If you think that inflation world-wide is under control and that interest rates
will either stay at current levels or even move lower, then what industries
would benefit from a lower interest rate environment?
– Alternatively, you see that the gold price is starting to move higher and that
the Rand is weakening against the US Dollar; you may consider looking at the
mining and resource industries.
Divide the South African economy into the three broad industries, namely:
– The mining industry,
– The general industry, and
– The financial industry.
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If you anticipate a lower interest rate environment - what specific sectors would
benefit from that?
– You may consider the banking sector, as the banks would be borrowing more
money as people take advantage of lower finance charges.
– You may also consider looking at the consumer sector (i.e. retailers, etc.).
– If you anticipate that the gold price is looking favorable, then you would zoom
in on the gold mining sector, for example.
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Within the banking sector, you would like at specific shares.
For example, specific banking shares such as ABSA, Stanbank or Firstbank, while in
the retailing sector you would look at Shoprite, PicknPay and Clicks.
The same would apply for the gold mining sector, where you would look at
Anglogold, Harmony and GFields for example.
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The final step is to see if these specific shares would meet your criteria in the
share selection checklist that you would use as a comparison benchmark for
shares that you think would offer potential.
In other words, this is your fundamental and technical reasons why.
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The Top-Down Method for finding interesting-looking shares is a very useful
method as it is a reliable and safe method.
Start forming the habit of formulating an opinion for yourself on all those markets.
Keep it simple: what is the trend? Is it up or down?
To get on top of all this information, you will need to read the daily financial Press
to be aware of what is happening in the world markets.
We suggest that besides the information which you can get from the PSG Online
website other good sources of financial information include:
– www.reuters.com,
– www.bloomberg.com
– www.money.cnn.com
Remember, that you want to formulate an opinion and then decide on a specific
plan of action.
You may be wrong initially, but always learn why and then correct your actions.
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This method uses the financial press, such as the Business Day and Business
Report.
Other financial press that you may consider reading would be the weekly
publications such as the Financial Mail and Fin Week.
Skim through the newspaper, for example, and look at headlines for 'bad news’.
Would these companies be recovery situations?
Look for opportunities in the Daily Top Ten Up & Down and Most Overactive
columns, etc.
A word of caution though - beware of "Analysis Paralysis", where you subscribe to
every publication and newsletter, and you start feeling overwhelmed with
information.
Be selective when choosing the resources you use.
You do not make a decision and you do not make money!
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PSG Online’s website (www.psg-online.co.za), as well as many other local
financial websites, including www.businessday.co.za, www.busrep.co.za,
www.fin24.co.za and www.moneyweb.co.za also offer additional sources of
information on interesting looking shares.
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Alternatively, focus on the sectors and individual shares of personal interest
to you (i.e. become a 'specialist' and then a 'generalist').
For example, if you are an engineer, then focus on the engineering sector.
If you are a medical doctor, then focus on the healthcare and pharmaceutical
sectors.
With whom do you bank with and who are you insurers?
There are reasons why you like them.
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Once again, you have to do a lot of reading but smart reading!
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This fundamental analysis method means the keeping of a financial diary, in which you
would record the financial year-ends of all the companies that may interest you.
It is suggested that a bi-annual book like the JSE Digest would be useful in providing this
information.
You would then anticipate what their financial results would be by first looking at their
past five year performances and then estimate what the results would be like within the
current economic climate. Would it be "good" or "better than expected"?
If you anticipate good results and you believe that the market in general has not picked up
on this yet, then you would get in now before the "crowd".
Remember, the financial results are usually only printed in the financial press two to
three months after their financial year end.
This gives you that short window of opportunity to make some money fast!
Alternatively, we suggest that you use the Research facilities available on the PSG
Online website such as the Value and Quality Filter, which saves a lot of time.
The Filters help to narrow down the choice by using 12 fundamental search criteria.
The Company Analysis is a one page research document on every financial and
industrial share, which provides all the pertinent research information an investor would
require to make well-informed investment decisions.
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The technical analysis method of prospecting for shares involves the "scrolling“ through
of charts using various technical analysis indicators to find shares that are "oversold" or
presenting a buying opportunity.
This could be very time consuming!
The Wen Professional Plus charting software will help you track the market, as well as
the shares that you may be interested in.
At PSG Online we provide our clients with this software for FREE all you pay is a monthly
Datashare download which comes from the JSE and is the daily closing share prices.
This monthly cost is R169 (incl. VAT) *minimum 6 month subscriptions.
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One of the modules available in the software is called the Hi-Liter Scanner.
For example, you may be looking for shares where the price is trading above its 21 & 40day simple moving averages (i.e. the trend is bullish), while the Relative Strength
indicator is outperforming relative to the JSE Overall Index.
You would select the HiLiter criteria and “scan” a
list of shares, looking for
shares that will meet
specific technical criteria.
A list of results will be
produced, which will need
further
analysis
and
visual confirmation.
Big time saver!
Using the four methods as
discussed above, you may
come up with a list of
interesting-looking shares for
further investigation. You may
have decided on some shares
using the Top-Down Method,
some from reading the
financial press, some using the
fundamental analysis method
and some using the technical
analysis method. It is this
group of shares that you are
now going to add into your
own watch list.
Step #1 was to narrow down the choice and create an initial
watch list (or three) of interesting–looking shares.
Now in step #2, we need to tweak our selection further …
Activity: Ensure that you have compiled your Watchlist in your PSG Online Trading
Account before moving onto STEP 2!