DISCLAIMER: The following material was presented at ASX Investor Hour.

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1 ASX Investor Hour DISCLAIMER: The following material was presented at ASX Investor Hour. The views, opinions or recommendations of the presenter are solely those of the presenter and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN and its related bodies corporate ( ASX ). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX and its employees, officers and contractors shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided or omitted or from any one acting or refraining to act in reliance on this information. Presenter: Colin Nicholson, author Topic: Building wealth through shares share selection strategies Date: 5 October 2011 Location: Melbourne Investor Hour

2 Building wealth through shares Share selection strategies Colin Nicholson ASX Investor Hour Melbourne 5 October 2011 Copyright Colin Nicholson 2

3 Investing Part ownership of profitable companies Income stream Capital growth Total return Copyright Colin Nicholson 3

4 Speculating Exploit changes in price Capital growth Copyright Colin Nicholson 4

5 XAO XAOA D Investors total return Speculators price change Copyright Colin Nicholson 5

6 Objective of Investors Beat Accumulation index Or Target return Copyright Colin Nicholson 6

7 My portfolio return Copyright Colin Nicholson 7

8 Investment grade stocks Make profits Pay dividends Afford a margin of safety Copyright Colin Nicholson 8

9 My two models Value Growth Copyright Colin Nicholson 9

10 Distribution The value model Distribution Downtrend Buy breakout Or buy in uptrend Uptrend Accumulation Copyright Colin Nicholson 10

11 Example GUD - G.U.D. HOLDINGS > +.6% to 6.35 W Distribution Uptrend 3.00 Downtrend Accumulation Copyright Colin Nicholson 11

12 The growth model Buy breakout Or buy uptrend Uptrend Consolidation Uptrend Copyright Colin Nicholson 12

13 Example WOW - WOOLWORTHS LTD > +.8% to M uptrend Consolidation Uptrend Consolidation Uptrend Consolidation Consolidation Copyright Colin Nicholson 13

14 Complementary tools for stock selection Fundamental analysis Good: Estimating value Poor: Timing Technical analysis Good: Timing Poor: Estimating value Copyright Colin Nicholson 14

15 The way I use these tools Timing Technical analysis Likely to trend upwards (breakout) or already trending Margin of Safety Fundamental analysis Low price earnings ratio High dividend yield Conservative debt to equity Strong return on equity (ROE) Sufficient liquidity Copyright Colin Nicholson 15

16 How I find these stocks 1 Timing Technical analysis New 52 week highs (stocks that make profits and pay dividends) This is my primary weekly scan Example Copyright Colin Nicholson 16

17 Example of technical analysis scan Copyright Colin Nicholson 17

18 How I find these stocks 2 Margin of Safety Fundamental analysis Low price earnings ratio (stocks with positive PER and pay dividends) Best after reporting seasons Finds a lot of stocks headed out backwards Example Copyright Colin Nicholson 18

19 Example of fundamental analysis scan Copyright Colin Nicholson 19

20 Case study Thorn Group (TGA) Copyright Colin Nicholson 20

21 New all time high TGA - THORN GROUP LTD > +.6% to EXP MOV AVS 260(0) day week high D J F M A M J J A S O N D 2006 J F M A M J J A S O N D 2007 J F M AM J J A S ON D 2008 J F M A M J J A S ON D 2009 J F M AM J J A S O N D Copyright Colin Nicholson 21

22 Company profile Established with the opening of a store in Sydney in 1937, the Company has a long history of renting electrical appliances to Australian consumers. Today, the Company offers a wide range of audio visual products, kitchen and laundry appliances, computers, furniture and gym equipment through a national store network, making it a leading operator in the household goods rental market. The underlying strength of the core rental business and associated positive operating cash flows has enabled the Company to achieve substantial growth in recent years and provides a sound platform for development of strategic initiatives. The Company is building on its substantial core business and competencies to provide an even broader range of products and services to the Australian marketplace. This includes consumer cash loans through its Cashfirst brand, specialised commercial rental via Thorn Business Services and internet retail via BigBrownBox.com.au. Source: Thorn Group Annual Report Comment: It seems to me that Thorn Group s business is centred on low income earners and I difficult retail conditions, their business might thrive by allowing consumers to rent as they pay off the cost, so conserving funds, although at a cost. As such the present tough times for consumers, who are reluctant to spend might be perfect for Thorn Group. Copyright Colin Nicholson 22

23 Model identification TGA - THORN GROUP LTD > +.6% to EXP MOV AVS 260(0) day D Uptrend Downtrend J F M A M J J A S O N D 2006 J F M A M J J A S O N D 2007 J F M AM J J A S ON D 2008 Accumulation J F M A M J J A S ON D 2009 J F M AM J J A S O N D Copyright Colin Nicholson 23

24 Earnings and dividend quality Copyright Colin Nicholson 24

25 Margin of safety Pre purchase Checklist Mkt Av Any Assessment Margin of Safety Criteria Stock Plan Req Guidance V Plan Price Earnings Ratio no ok Dividend Yield 4.92* 3.73% no ok Franking yes Yes no ok Debt/Equity Ratio 8.70% <60% no ok Mkt Capitalisation $135m >$100m NA ok Liquidity (22 day Av) $264,000 Enough NA maybe * My calculation ROE was ~30% - my guide >20% Copyright Colin Nicholson 25

26 Chart analysis TGA - THORN GROUP LTD > +2.5% to 1.63 D J F M A M J J A S O N D 2006 J F M A M J J A S O N D 2007 J F M AM J J A S ON D 2008 Accumulation pattern J F M A M J J A S ON D 2009 J F M AM J J A S O N D Copyright Colin Nicholson 26

27 Set stops TGA - THORN GROUP LTD > +2.5% to 1.63 D Sell-stop $ New method: Trough low $0.89 Soft stop $0.885 Hard stop $0.87 Position size calculated on hard stop J F M A M J J A S O N D 2006 J F M A M J J A S O N D 2007 J F M AM J J A S ON D 2008 Accumulation pattern J F M A M J J A S ON D 2009 J F M AM J J A S O N D Copyright Colin Nicholson 27

28 Calculate position size Total Capital 2,001,561 Buy Price 1.10 Sell Stop 0.89 Risk 0.21 Always play for meaningful stakes Max Gunther The Zurich Axioms % Capital to Risk 0.5 Maximum Position 47,656 % Capital to Invest 2 Position it buys 36,392 Position allowed 36,392 Lesser of the two Buy % capital risked 0.38 Copyright Colin Nicholson 28

29 Subsequent earnings and dividends Copyright Colin Nicholson 29

30 How the chart unfolded TGA - THORN GROUP LTD > +2.5% to 1.63 W Sold Bought J FMAM J J ASOND 2006 J FMAMJ J ASOND 2007 J FMAMJ J ASOND 2008 J FMAM J J ASOND 2009 J FMAM J J ASOND JFMAM J J A SOND 2011 Copyright Colin Nicholson 30

31 Result of investment Total sale proceeds 54, less Total purchase cost 39, plus Dividends 5, plus Imputed credits 2, Net total return 22, % of capital 1.14 Note: dividends 33% of total return Copyright Colin Nicholson 31

32 Key points Timing Technical analysis Likely to trend upwards (breakout) or already trending Margin of Safety Fundamental analysis Low price earnings ratio High dividend yield Conservative debt to equity Strong return on equity (ROE) Sufficient liquidity Copyright Colin Nicholson 32

33 My complete Investment plan with examples and case studies Also consider Max Gunther The Zurich Axioms Copyright Colin Nicholson 33