Anyone planning to make money from market recovery?

Hi, have been looking for a thread on this, but can't see one... thought I'd post to see if anyone has similar thoughts...

I know there is general gloom and doom re. share markets and world finance etc., but more and more there is talk of a recovery. (Also, in terms of market pullbacks... this is a substantial one, but not as bad as some... so we can assume it will recover and go on to new highs in time.)

So... using the 'buy while there is blood running in the streets philosophy...', what do we do?

My current thinking, general strategy.

1. Assuming we have funds available - either cash or real estate LOC
2. Buy quality shares - bias toward ones with rebound potential (fear oversold) and strong dividends to service loans (franked or un-franked)
3. Margin loan... at 1:1 gearing (conservative) - can double the initial investment.

Few more thoughts...

a) If we use all borrowed funds... say LOC + margin loan... then need to service the loans (as close as possible anyway)... could look at shares such as major banks CBA, WBC, ANZ, also, property trusts such as GPT, MGR, MCW, MOF, IEF, ILF. Far as I can see they are maintaining their distrubutions... (could be wrong, but can't recally reading anything saying they were cutting...).

b) As per the 'Bank Holiday' newsletter from Eureka Report (saw on this site), the major banks at least have a history of increasing dividends... so time makes the repayments easier.

c) Large companies are down a long way basically due to fear it seems... all the codes listed above are very low compared to October 2007, and would represent substantial gains to get back there... even something like CBA for example... now about $43, if recovers to $60, that represents close to 40% gain... for a massive 'darling of the market' company!

d) Even if it takes 2 or 3 years for some of these companies to fully recover... doesn't matter much if we're close to funding the investment with dividends.

e) Re. fear of margin call... i) the LOC/cash part of the investment would not be exposed to a margin call; ii) the margin loan part could of course be exposed... however, if borrowed at 50% against shares that are 70% LVR, need a 33% fall to trigger margin call (I think that is right... haven't confirmed, sorry if a little out)... NOW, it is a 33% fall from CURRENT prices... if that happened, it would be in order of a 50% fall from October 2007... like 1987, 1929 situation... certainly possible... but... worth taking a chance on?
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Applying some real dollar amounts to this... if could access say $200,000 of cash (say via LOC), margin loan out another $200,000... have $400,000 exposure to crashed market shares... hold on for several years... if could get 40% gain overall... looking at $160,000 gain... for doing nothing much except sitting on a group of shares... and it's using all borrowed money (OPM)... money out of nothing. (Maybe another form of 'living off equity' too for the people from real estate perspective.)

Anyway... sorry this is a longer note that I would have liked, but needed to explain the idea enough.

What do people think of it? Sensible? Or is there a chink in the armour I haven't seen?

Thanks for that... Ilori

 

ilori, this is pretty much my line of thinking.

Despite all the negativity, I keep telling myself, these are the opportunities to replicate the past - In the past we know many people made big money on the rebound after a fall.

I honestly can't see another 30% fall around the corner, the massive losses sustained were due to Global Credit and Bank Exposure and subsequent companies that were highly reliant on finance.

Despite not being directly involved, many companies SP took a hit... Look at WBC for example, down about 30% at worst case due to the negativity in the media, yet are in a strong enough position to launch a takeover of SGB....

I'm looking to buy in with SFI's and DCA into High Growth/Aus Share MF's on Margin.

I also feel that unlike 1987, there is more activity and trading. Mums and Dads have an interest via Super Funds, or many hold some stocks themselves. Hold on for the longer term, look back in 10 years and hopefully we outpace inflation!

 

Thanks Insan,

It seems like a sensible way to go to me, yet when I talk to people, they think I'm mad to consider buying shares... but I struggle to agree with them... Maybe I just talk to the 'wrong' people

Interesting thing... that mathematics are on our side re. a recoveries... example... if a share fall 50%, when it recovers to original level, will be a 100% gain. Media reports the original fall... but the recovers will be a larger % than the fall.

I think if the general strategy is good... then the trick is to get the mix of shares right... have to concentrate on ones that have good dividends... so can make the loan payments... but also need ones that will rebound and make the whole exercise worthwhile... could even factor in a couple that are just for growth... such as BHP, WOW but the have low dividends... so would need to make sure other shares in the portfolio cover the costs of these poor payers (but the benefit of BHP, WOW etc. is that they would add some stability and long term growth potential).

Longer term... the effect of the strategy could be powerful... if get strong growth over several years... then buy more and increase holding... eventually decide what to do... whether let it 'settle' and become a cashflow positive portfolio or draw down some of the cap. growth and use for living or other investments...

Wonder if there is a good structure to hold it in? Whether Trust is best or personal name as good as any?

Thanks again...

 

Peter Spann was suggesting a "flight to quality" to the top asx 20 shares.

Our 20k Loc should settle next week. The intent for it is the purchase costs for an investment property. Its tempting to invest it in shares or funds instead at the moment, except, we dont know for sure that the market will head up in the short-medium term... It may bounce around trending sideways for a while.

(property is flattening out in Hobart as well, but there is still strong rental demand, and rents will go up over time)

 

I must admit I have never looked much into the benefits of holding in a Trust compared to Personal. I currently don;t have a large enough holding to make a difference.

1 point not to forget... not sure what MTR you fall under, but keep that in mind when hunting stock paying div's. You don;t have to necessarily get the ones paying 10% with min/neg growth prospects.

If you are on 30% MTR and Margin Lending at 10%, you can claim the Interest. If you are getting Fully Franked Div's, tax is already paid.

So my understanding is:
$100k ML @ 10%, invested in stocks FF @ 30% paying 5% Divs.

ML Interest = $10,000
After 30% Tax Deduction, Out of pocket = $7,000.

5% Div's = $5,000
Imputation Credits = $2142.85

So Holding Costs are near enough to Zero and hopefully there is some CG.
Someone please correct me if this is all wrong!!

 

Insan, good point about 1987... something else just came to mind... 1987 is often used as a comparison with this current crash... some say 20 years is significant... some of the cycle/Gann followers also see a connection... whether there is or not I'm not sure... but I seem to remember reading somewhere that the 1987 crash was exacerbated by the trading computer systems at the time (something about automated selling?)... I assume that wouldn't happen now... also, I'm no expert on this... but I understand the way Central Banks manage economies has evolved (try to smooth out the boom/bust cycles)... so to draw a comparison between 1987 and 2007 might be convenient, but the usefullness of the comparison may be questionable.

Thanks again, Ilori

 

Thanks Voigster,

Yes, I was at a Peter Spann seminar recently and heard that too... I get feeling he's generally looking at share based investing now regardless. (I assume it feeds into his business model better than real estate... but I don't know.)

Indeed, none of us know what the markets will do... certainly anything could happen... imagine another 911 in current environment... or a global virus outbreak... or another major bank failure... all possibilities... but I suppose we have to take a calculated risk based on balance of probabilities.

Re. Tasmania... maybe check if there is natural demand and population growth there... I heard that Tassie kicked up a bit a few years ago... but whether that was natural demand or mainlanders buying over there fleeing Syd/Melb markets? Something to investigate if you're considering buying.

Thanks, Ilori

 

hanks for that Insan,

That’s something I’m a little unclear on… how FF dividends really work. So, in your example, loan cost is $10,000 and dividends are $5,000 (cash), so during year would you need to find $5,000 to fund the shortfall? I assume don’t get any tax benefit until end of tax year?

Would shares paying unfranked dividends be better at servicing loan that franked dividends (assuming same end value)? Example, a share paying 7% unfranked would be better at servicing a loan than a share paying 5% FF, because with 7% unfranked getting the actual cash and don’t have to wait till tax time to square it up?

Also, if I have a lot of deductions and am below 30% tax level… do I physically get cash reimbursed to me from FF dividends? Or, do I just get a tax credit to offset later?

Sorry if the terms are not right, I’m not really up to speed on how FF divs work.

Regards, Ilori

 

Hi Ilori,

FF dividends means that the company has already paid tax at the company tax rate for you (ie, 30%). If your on the 30% bracket you don't have to pay any additional tax (well apart from Medicare Levy of 1.5%).

If your marginal tax rate (MTR) is less, you will receive a refund!

If your MTR is more, you will have to pay the difference between your MTR and what has already been paid.

If you receive a $1.00 FF dividend, the company has already paid $0.43 tax on your behalf ($1.00 x 30/70).

So your 5% FF dividend is worth 7.1% unfranked (as 2.1% has been paid in tax on your behalf by the company).

Cheers,

Dan

PS Before making an investment decision speak to your FPA registered Financial Planner.

 

Thanks Dan,

Do you know if I can get the tax benefit during the year… something like can do with real estate investment?

I’m just trying to work out which is best for servicing a LOC or margin loan, which would require regular payment… would the grossed up benefit of FF dividends be ‘useful’ during the year in servicing a loan or is the benefit only realized at end of tax year?

I’ve looked at examples of how a portfolio of shares can be funded with FF dividends (big banks a good example), but wary of how it works in practical way. Might look OK at end of year from accounting sense, but if there is significant hardship during year actually funding it then that needs to be factored in. (In simplistic sense… loan payments and food on table needs cash… rather than tax deduction… just trying to understand it from that angle.)

Thanks again, much appreciated, Ilori

 

Hi ilori,

You could do a ITWV with the ATO to adjust the amount of tax deducted from your income.

You'd have to rely on the dividends remaining pretty much as you would expect though, or you might have some cash to pay back at tax time.

 

Ilori..

Looking back in two years time or so, I'm betting we'll hear of Fortunes being made over these days of Doom & Gloom

 

And if not 2, it'll be 3 or 4.

Either way, this is the time to strike now, make gains on the rebound.

 

Thanks for that,

Good to hear... as I mentioned in an earlier post, I've been running in people who tell me how bad things are, to not take any risks. One guy I know, who is quite well read, is wanting to put his money into Gold because he fears the financial system is imploding and the value of money is being diluted at a catastrophic rate.

However, the more I read, the more it seems clear that the wealthy enhance their wealth in times exactly like this. I've even heard it said that Buffett will get on TV and talk up the possibility of recession and difficult times... but behind the scenes is buying... like he putting doubt in the public's mind to keep prices down so he can snap them up.

I think the 1987 crash took about 6 years to fully recover (depending on definition)... so would indeed be reasonable to assume that in a few years the market will be moving along again... maybe even far sooner than that.

Thanks again, regards, Ilori

 

Hi ilori,

I too have seen the same figures regarding bounce-backs. Generally 20% falls in 1 year will be regained after 12 months. Not so good for those who copped the losses, but for you, getting in while it is down and you may pick up some nice opportunities.

I quite like financials (!) The bigger banks and some insurance companies. Because despite the problems they have had at the moment, they are likely to move on and make million $$$ profits year after year... And people need insurance... Yes there is negative talk, but they are still here, posting profits. Some people still buy mining shares for exploration companies who might find nothing....

I'm young, so I'm in - nothing much to lose ($100k Capital Gains from Property Investments!! - I'll still have my job!), plenty to gain.