Trading with Focus: Trades hiding in plain sight

Sometimes we get so caught up in chasing the Lotto-sized wins that we miss the safer, smaller, regular wins.

When we were kids, we travelled around the UK and Europe in a campervan. My parents were teachers, so we went from ‘place of interest’ to cathedral to museum in a 12-month long loop.

This was back before the euro came into being, so there were still different European currencies and this young lad unknowingly learnt to arb currency. The desire for Lego was strong, and the disparity between the price of Lego in different countries due to their differing monetary policies was sufficient motivation for me to learn how to do maths.

My dreams back then were small, but over time my small currency wins added up. Whilst my peers back in the ‘hood were (in my mind) still playing with hand-me-down Duplo, I had a full Lego-Technics working tractor and a functioning car chassis that had an engine with pistons that went up and down, functional 4-wheel independent suspension and steering. Even the seats were adjustable!

So, over a 12-month period, with only the base capital from my very meagre kid-salary and some birthday money, I came home Lego-rich. Proud as punch I was, rolling back into town with the car and tractor, all assembled using a set of instructions written in some middle-European language.

Something earned is somehow more valuable, as proven by the fact that whilst I was away my spoilt-brat best frenemy was given a remote control Jet-Hopper and we drove it off his roof just to see what happened (what do you think happened?!), whereas I still own that Lego today. Lotto winners buy cars and wealthy SMSF retirees pick dividend reinvestment.

Now I trade the market.

Like all animals, we are pre-wired to strive to collect as many nuts as we can for the winter, to eat as much as we can and store it as fat for the lean times. Ever seen a rat in a grain silo? They eat and eat until they burst. In the grain.

Grain that’s used to make bread. Your bread.

Back in the early days, I was obsessed by the big wins. I salivated over the 10-baggers and started trying to find the next one. What that meant was taking more and more risk, and of course, losing as often, if not more, than I won.

Whilst our competitors are ramping up the risky FOMO trades and trying to suck kids into rocket ships, we choose to stay classy and talk about risk and loss and protection. The stockmarket isn’t a place you go and get rich and leave, but it can be a place you go to print small amounts of money over and over again, in good markets and bad.

Then, with the magical power of compounding, one day you too are buying cars with adjustable seats!

So, let’s have a look at alternatives to rocket hunting. Keep in mind in all of human history, only Elon Musk has landed a rocket with any sense of style and I’m not fully convinced he is human.

The following is a chart of a very boring stock. Its name doesn’t matter because its only being used to highlight my point, but let’s just say it is a property trust that owns smaller shopping centres in residential areas where people still have to go and buy food.

Property trusts have two jobs – keeping tenants and maintaining their debt ratios. In the GFC, the debt ratios destroyed many of them, but in Covid-Crash-2020 it was the fear of mass tenant bankruptcies that hit them hard. So, they raised a bunch of cash very early on to make sure their debt ratios wouldn’t be affected, then people were still allowed out to buy food, and they didn’t collapse under the weight of mass tenant bankruptcies.

Post-GFC, the property trust sector was an excellent investment (after it was absolutely crunched). Good properties in good locations slowly grow in value, and the gearing enhances their returns. The tenants pay rent, and that is usually benchmarked against inflation. Lending costs for quality assets are low, especially if the anchor is someone like Woolies or Coles.

So the capital value grinds up and new properties are added to the portfolio (or sold), the rent keeps up with the interest and the inflation and voila! You also get dividends.

Some local hair salons will close, but eventually another will open and the rent book builds back up.

For the sake of investment sanity, let’s forget about the world pre-Covid. Have a look at that chart that starts in mid-March. You will note there are no ‘rockets’, no huge 10x rallies. In fact, it looks very boring and most people will avoid it.

But what a sexy pattern for scraping a regular earn.

Do the maths, arb some Lego across borders, ask yourself if a very low risk company/trust such as this would make it easier to sleep at night.

There are no drill results with poor grades, no dry oil wells, no mine wall collapses… and a well positioned stop-loss will help protect your capital against some black-swan event.

Trade 1 – May to June

Buy at $2.10, sell at $2.30.
$5,000 becomes $5,476 – $10 in brokerage = $5,466 net.

Trade 2 – Aug to Sept

Buy again at $2.10, sell at $2.30.
$5,466 becomes $5,986 – $10 in brokerage = $5,976 net.

Trade 3 – Sept to Oct

Buy again at $2.10, sell at $2.30.
$5,976 becomes $6,545 – $10 in brokerage = $6,535 net.

Total return

$1,535 on $5,000, net of brokerage
7% gross return
Around 60% annualised.

I’d take 60% annual returns if I could get them, especially if it’s a lower risk play in a safer sector than the ones I normally play around in. Plus, you might even jag a few more per cent in a divvie.

And if you are wondering what to buy before the vaccine, you can think outside the box of high-risk travel stocks and precious metals.

The net value of the properties (property value minus the loan value) is around $2.20, so this is the oldest and best trick in the book – buy a listed asset when it’s being offered at less than the assets are worth then sell it when it’s a bit above. This is the good kind of volatility!

So, honestly, it’s boring and it’s not an overnight ‘rags to riches’ story. But for a sector that has a risk setting that often sits just north of cash and well south of the crap you’re probably buying, it’s not a bad risk/return profile.

Put your greed in check. Look beyond the ‘most talked about stocks’ and start digging for cash in the forgotten. You’ll sleep so much better!

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This article was developed in collaboration with Marketech Stockbroking Pty Ltd (AFSL 486148), a Stockhead advertiser at the time of publishing. This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.