Getting back into gear(ing)

Selling our investment property provided enough net proceeds to pay off most of our home mortgage, and I was initially planning to use the cash flow freed up by the elimination of home mortgage repayments to start paying down some of my existing margin loans. But a side-effect of paying off the investment property loan and the larger of our two home mortgage loans was that our two 'portfolio loan' accounts (secured against our house title) of $250,000 each were cleared and available for investment purposes.

DW decided to draw down $50,000 from her portfolio loan sub-account and use it to fund a $150,000 stock portfolio (borrowing the other $100,000 on her Comsec margin lending account). She'll be able to 'pre-pay' 12 months of margin loan interest next June (just before the end of the Australian financial year), but will help reduce the capital gains tax payable on the sale of our investment property.

Helping her 'pick' stocks to invest in re-kindled my appetite for geared stock market investing, so I borrowed $96,000 from my portfolio loan sub-account and invested it in a dozen Australian stocks (about $8,000 worth of each stock). As I have a mediocre track record of 'picking' individual stocks (I'm a sucker for a 'good story' and have tended to believe the optimistic forecasts touted in company annual reports), I decided to apply a fairly rigid stock-picking formula and see how it works out over the next 5-10 years. The goal is (obviously) to out-perform the ASX200 stock index (otherwise I'd just invest in an index fund), and the 'hope' is that the worst of GFC/EFC period is pretty much over and that we'll get back to the long-run rate of return that the stock market has historically provided.

While many people feel that 'this time its different' and that post-GFC the global economy will remain subdued for many decades and stock market returns will remain well below the trend average, I think there's a good chance that stock market returns will 'revert to the mean' with the potential for some good years in the stock market in the coming decade, once the developed economies get back to more 'normal' growth rates.

My stock picking methodology for this particular portfolio of stocks was:
1. Take the current ASX200 list of Australian stock (ie. the biggest 200 by market capitalisation)
2. Wash these against the list of 100 or so stocks listed in the book 'Top Stock 2013' by Martin Roth (an annual guide that casts a critical eye over key financial indicators to, hopefully, eliminate 'dogs'). This reduced the list of 'possibles' to around 50 stocks.
3. Plot the 1-year chart of each of these 50 stocks against the ASX200 index, and eliminate stocks that hadn't outperformed the index. This left a final selection of twelve stocks to invest in:

Code	Description	Quantity
ANN.AU	ANSELL LIMITED ORDINARY FULLY PAID	392
BRG.AU	BREVILLE GROUP LIMITED ORDINARY FULLY PAID	890
CBA.AU	COMMONWEALTH BANK OF AUSTRALIA. ORDINARY FULLY PAID	109
CWN.AU	CROWN LIMITED ORDINARY FULLY PAID	512
FLT.AU	FLIGHT CENTRE LIMITED ORDINARY FULLY PAID	165
GWA.AU	GWA GROUP LIMITED. ORDINARY FULLY PAID	2658
MTU.AU	M2 TELECOMMUNICATIONS GROUP LIMITED ORDINARY FULLY PAID	1269
NVT.AU	NAVITAS LIMITED ORDINARY FULLY PAID	1348
RHC.AU	RAMSAY HEALTH CARE LIMITED ORDINARY FULLY PAID	221
SUL.AU	SUPER RETAIL GROUP LIMITED ORDINARY FULLY PAID	607
TRS.AU	THE REJECT SHOP LIMITED ORDINARY FULLY PAID	450
WBC.AU	WESTPAC BANKING CORPORATION ORDINARY FULLY PAID	241

After one year I'll sell these stocks (so any capital gains are 'long term' and taxed at half my marginal tax rate) and reinvest the account balance in a new selection of 10-15 stocks (the number will depend on the value of the portfolio at that time and the number of stocks 'short listed' using the same methodology). Barring major disasters (eg. GFC Mk II) I plan on sticking with this for 10-15 years until I get towards retirement age.

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