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Piata Investments - The Intrepid Investor Series (Part 3)

Matt Brennan

Following the release of the March quarter results this month on the Australian share market, the

presence of a dual speed economy has never been more apparent. Investors are clamouring towardshigh yield stocks (companies that pay generous dividends) as these have been surging on the back of

pessimism within the mining & energy sectors. The big 4 banks in particular have soared, with

Commonwealth bank (CBA) recently hitting an all-time high at $71.735 on the 24/04/2013 during

the afternoon trading session.

When Rio Tinto (RIO) and BHP Billiton (BHP) are getting clobbered on the share market, which they

have been recently, I am deliberately biding my time before I enter, as I know these companies have

sound fundamentals (healthy balance sheet, CEOs with proven history of performance and strong

cash flows amongst other factors). I imagine these two companies and others with similarly strong

fundamentals as piata investments, as each day when they are wholloped by negative macro-economic news, sees me lower in my crouch position ready to dash for these securities when their

price falls to my predetermined threshold (based on long term average performance).

Dash for Cash: RIO and BHP are two examples of piata investments - Image Courtesy of Google Images

This approach may seem a bit morbid, but keep in mind that the stock market is separate from the

real economy. The deflation of a stock bubble fuelled by speculation has minimal impact on the

workers at Rio Tinto. Sure, executive share packages (RIO no longer rewards executives with options

from 2013 onwards) may tumble if the RIO price plummets, but the board of directors do not lose

their jobs if RIO drops 4.12% in a day (equivalent to more than $1billion*). The most prominent

example of the separate nature of the share market and the real economy is Boral Ltd (BLD). On

16/01/2013 it was announced that 700 Boral workers would lose their jobs, which is very

unfortunate news for the employees and their families. On the back of this announcement, Boral

http://www.google.com.au/url?sa=i&rct=j&q=pinata+money&source=images&cd=&cad=rja&docid=BVckl9px1h8srM&tbnid=Ntrl7Efk7O15PM:&ved=0CAUQjRw&url=http://z3.invisionfree.com/PseudoRadio/index.php?showtopic=1296&ei=N0l6Ud-gKZGWiQecj4DwDg&bvm=bv.45645796,d.aGc&psig=AFQjCNEndAeyFeIshSzjDJO3SnJOfVA4XQ&ust=1367054908376863

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shares leapt 7.87% as market sentiment suggested that this move would boost international

competitiveness (since that day Boral shares went up a further 10% before easing slightly).

The Moving Average Convergence Divergence (MACD) is a charting tool used to dispose of

investments that are overbought, or as Snoop Dogg more eloquently frames it, drop it like its hot.

The MACD has a secondary function which is particularly useful for piata investments, and that is tohelp determine when the piata has first split open.

RIO Price graph and Moving-Average Convergence Divergence Chart (M-AC DC)

The period captured above is for RIO from the beginning of May 2012 to when this article was

written. Firstly, some MACD basics: The Blue line is based on a 25 day moving average of the price of

RIO whilst the red line, sometimes called the trigger line, is based on a 12 day moving average. The

further these two lines are apart (divergence) determines the strength of a trend (the strongest

divergence occurred during May, December and March for RIO above). The two lines coming

together (convergence) indicate a buy or sell in RIO. Finally, the numbers on the y axis represent the

momentum or relative strength of whether an investor should buy (-2), hold (0) or sell (2). When the

MACD lines crossover below (-2) and above (2) it is a very strong signal to the investor that theyshould buy or sell a piata investment. Crossover points between (-2) and (2) are more useful for

traders looking to make a small return but in a shorter time period, however, trades based in this

parameter incur greater uncertainty.

Now lets assume an investor opens an account on a platform which has $24.95 brokerage per

buy/sell for an investment of $5,000. To be consistent, all purchase acquisitions and disposals will

occur at the opening price of RIO for the specified day as this implies we have acted upon a trend as

soon as it occurs. Following the MACD and piata investment logic for Rio Tinto, there was a strong

downward divergence trend through May culminating in a buy at 01/06/2012. This then lead to the

receipt of a dividend on 15/08/2012 (for the purpose of this example, the investor does not opt for aDividend Reinvestment Plan [DRP] which reinvests dividends back into the company with nil

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brokerage). Another strong divergence culminated in a sell on the 08/01/2013. The final

convergence and divergence occurs with a buy on 09/04/2013. The outcome of this investment is

tabulated below

The tremors which have hit the mining and energy sectors in the share market are cyclical in nature.

They are merely stockwaves which result from the effect of a growth slowdown in the Chinese

economy being perceived as a financial earthquake and this in turn has caused a market tsunami,

wiping out billions of dollars between these two sectors in a matter of months. Caution should be

applied however if RIO or similar companies slump immediately after the announcement of

company specific news (lower grades of iron ore in their flagship mine for example) as bad news

rarely happens in isolation. Adopting the piata investment^ and MACD approach in tandem

provides the sweetest rewards upon recovery, and ensures the investor is not left watching the

potential haul disappear and being left with nothing but a handful of Turkish delights.

*Based on RIOs present market capitalisation of $24.315 Billion (Source E*Trade)

$24.315 billion*4.12% = $1,001,778,000

^Before investing in piata investments a conscientious review of individual financial circumstances

and risk appetite should be undertaken.

Date Buy Sell Dividend Value of portolio Cash Additional tax benefit

1/05/2012 5,000.00$

1/06/2012 89 shares at $55.42 4,975.05$

15/08/2012 89 shares at 68.51c F/F 4,975.05$ 60.97$ 26.13$

8/01/2013 89 shares at $67.52 5,984.33$

9/04/2013 106 shares at $55.80 5,959.38$

Total Net Worth 5,959.38$ 60.97$ 26.13$