Owen Richards has reservations about the large number of investors who emulate value investors Warren Buffett and Ben Graham.
Sixty-eight-year old Richards maintains that value investing, which is essentially buying when a stock is out of favour with the market and then waiting for the market to wise up to itself, is well and good if you have the time to wait for this to happen. But he argues that many investors “don’t have time to await the market’s pleasure”.
Richards, who has an investment portfolio as part of a Self-Managed Super Fund (SMSF) as well as a more aggressive non-super (secondary) portfolio, strives for a balance between growth and value investing. “I’m not going to turn my back on growth opportunities because of some theoretical construct that says that value is better in the long term because I haven’t got a long term,” he declares.
He pursues a specific type of value investing referred to as contrarian investing, which ignores market trends by buying securities that the investor considers undervalued and out of favour with other investors.
Adhering to rules is not Richards’ bag. He has a plan but asserts that rigidity is contrary to what the market, which he is convinced is predicated on the chaos theory, is about.
His trading does however have certain tenets such as, never hold more than 10-12 stocks per portfolio at one time, (beyond that it goes from “diversify to di-worseify because you’re flattening the curve”) and steer clear of certain stocks: insurance companies (nasty surprises and tortuous accounting), aircraft companies (sudden falls), mining, oil and gas explorers (not producers), biotech and tech start-ups (all financial sinkholes) and any with certain Directors (leopards don’t change their spots), Richards admits has been foundation on which he has built his success.
This is his second foray into the market. The first was in the 1980s when he dabbled simply “to keep up with the Jones”. He got his fingers burnt in the 1987 crash, losing around $20,000 and started paper trading again in 1999, just shy of his 60th birthday.
With a young wife and a two-year old child he knew he had to get serious about his superannuation and that if he was to start managing his own fund he needed to get a better understanding of the market.
In hindsight he recognizes that initially “like a long line of mugs before me and since, I went in too late when the smart money was selling off and there was a blow-off and I’d got caught in it along with many thousands of others”.
“What that taught me was that I knew nothing and that I had to get myself properly educated and trained if I was to go into the market seriously,” he says.
Trading seriously to Richards means being prepared to commit better than $50,000 in his secondary account and several hundred thousand dollars in his SMSF and assuming the risk associated with it.
He believes that the key to getting him where he is today was education. “But getting educated is not about going off for a two-day weekend and paying some guy $10,000,” he declares. “You can buy a lot of books for $10,000 and if you’re prepared to put in enough time, effort and discipline you’ll become educated. “It’s not brain surgery. Most of it is just common sense.”
Richards, who produces the Australian Investors’ Association’s Equities Bulletin, credits his former incarnation as an officer in the Australian Army for his highly disciplined approach, which he confesses has got him through a couple of “dark nights of the soul” that were triggered by heavy losses.
“Disciplined but not rigid,” he laughs granting that his twenty-six years in the Army has given him his ability to formulate a plan and stick to it.
He favours volatility analysis and uses Jim Berg’s Overbought and Oversold indicator and Volatility Stop Loss Indicator. Volume is an important factor and, if possible, (“if I can detect so-called ‘smart money’ action through volume and spread analysis”) he tries to buy selected shares during their accumulation phase.
Objecting strongly to the expression “playing the market” Richards says that trading should always be treated as a business. “If you can’t afford to lose money you shouldn’t be in the market,” he says.