Specialist Share Education

Dynamic Investor Program

26 March 2011

Important InformationGarry Davis is an authorised representative of Financial Services of Australia Pty Ltd which holds Australian Financial Services Licence No. 338 961. Garry Davis, working through Specialist Share Education is licensed to provide general securities advice only and this information has been assembled without regard to your particular investment objectives, financial situation and particular needs. Accordingly, you should consider the appropriateness of the advice before acting on it.The views expressed in the presentation are mine and are not intended to be trading recommendations.Specialist Share Education expressly disclaims all and any liability to any person in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance, whether whole or partial, upon the whole or any part of the information taught. Specialist Share Education will not accept liability for any loss, damage or expense incurred or suffered by you if you rely on any information provided in making trading or investment decisions.

What is General Advice?

• General advice may differ from what you might commonly understand or expect. General advice under Australian law includes information about securities and derivatives and the underlying markets and SSE’s opinions about, or outlook for these products.

• Any discussions with SSE employees about their view of current or future market conditions or prospects for a particular security or derivative should not be seen as personal advice, as they will not have taken into account your particular financial circumstances, objectives or needs. Rather, it should be regarded as general information for your consideration prior to making any decision to deal in any product

Course Overview• Big picture cycles• Changing your approach• Trends & phase analysis• Profitable price patterns• The key fundamentals that work• Establishing portfolios & managing investments• Investing where the money is– Predominantly resources

• Ongoing information & monitoring

• Discard all your reference points & preconceptions about what should be

• Tap into the big picture cycles– BRIC economies to surpass the 6 largest western economies by 2030

• Wear a different thinking hat / changing perspective• Stay ferociously focused on your plan

– Shut out media noise & public opinion– Stunning results are possible with low activity

• Cultivate – Patience– Resilience– Discipline

Investing Success in Overview

How Do Most Invest?• Hand-over responsibility to others• Diversification– Nice mix of boat anchors, average performers & a few

good performers at the periphery– This approach just says you have not done your

homework sufficiently to have confidence in your judgement

• Complain about the outcome– Fund managers will always produce mediocre results

partly because we have forced them into a corner

Big Picture Cycles• Next 10 years is the best opportunity to create

substantial wealth you will ever see– Global recovery– Central Bank stimulus / inflation– China & India growth & industrialisation– All points to ongoing commodity demand– Supply will catch up in bulk commodities but some will

struggle to meet demand for many years to come– We will get 20% to 30% corrections along the way

The Resources Super Cycle• We are closer to the start than to the finish– Producers are highly profitable already so commodity

prices don’t need to keep rising, but some will– Analysts long term commodity forecasts woefully low

so current share prices are not factoring in upside,eg RIO at only 8 times 2012 profit. The market has got the pricing of the majors very wrong

– Emerging producers still very cheap & prices will rise substantially as the good projects are de-risked

The Resources Super CycleKEY POINTS !

– We don’t need higher commodity prices for stock prices to rise substantially.

– We just need commodity prices to stay where they are for a while and analysts to wake up

– The M & A cycle is just getting started because there is huge value for the majors to be buying the mid-tiers

Your Big Picture Plan• This depends on you but …….– 25% pa after tax return is achievable if you stay

focused on your plan– What does this represent over the next decade for

you?– There is no question the opportunities are there– How well can you focus on this task for the next 10

years?– All you need is 1 hour per week unless you wish to do

the research yourself

What Do You Need to Do?• Give up following the news to invest

– Look at 2008 & March 2009– Those who followed the news missed a magnificent opportunity

• Follow the smart money

• Ignore daily fluctuations & focus on the trends & patterns that tell us what is coming

• Be prepared to actively manage• Be prepared to reduce exposure when necessary• Adopt a quite different mindset to trading & to “normal”

investing. Don’t think - just look

What Do You Need to Do?

• Avoid the following – holding onto losing trades that continue to decline in price– buying more shares to lower your average entry price, so

your risk is now much higher– getting “married” to an investment idea or specific stock so

that you cannot see reality– feeling like a loser if you do sell and then the share price

rises

What Do You Need to Do?• Realistic expectations when you get this right– 80% positive investment outcomes– 20% negative outcomes (max 50% loss)

• This requires– Strict selection criteria on fundamentals– Patience to wait for great opportunities– Courage to execute when the time is right– Courage to not be put off by group thinking when times

are uncertain– Continued focus on the big picture

What Makes a Good Investment• Great management– ROE% & track record

• Strong earnings history– 3 year average EPS

• Cheap– PEG less than 1.0

• Easily manageable debt

What Makes a Good Investment• In the right sector for the next 2 to 5 years

minimum• Dividends ??• SGP, BSL, AMC, WES, ARP, FGE, MCE

The Concept of Trends• Higher highs & higher lows = uptrend• Only invest with the trend• Sector divergence• Phase analysis

Phase Analysis• The 4 phases of every market & stock price• Prices fluctuate constantly from overly expensive

to overly cheap • Prices are rarely fair value• How to accurately determine the phase as an

investor– Angle & direction of the 150 day moving average– Relationship of price to the moving average

Phase Analysis• How to fine-tune your selections & entries– Identify the strongest sectors in a major correction or

bear market– Identify the strongest stocks in those sectors– Buy the dips

Our Methodology• Research on the fundamentals– Simple 5 point formula for profitable businesses– Checklist for emerging resource companies– Place into a watchlist

• Identify the patterns that are high probability for a positive uptrend

Entry Signals• When to enter– Breakout from phase 1– Confirmation that the first pause or correction in

phase 2 is probably complete– Increasing volume is almost always important

• How much to buy– Use a set dollar amount between 3% and 8%– 10% into any single investment maximum

Exit Technique• Triggers – Break of major support– Break and close below 30 week moving average for a

period of 4 consecutive weeks (exercise a little discretion on this)

– Lower highs and lower lows on weekly chart– Change in the fundamentals of the sector or

specifically the company– The start of a significant correction

A Bear Market• Significantly reduce exposure• Hedge remaining exposure• Short sell the sectors at risk

Where are Markets Now?• After a big mid cycle crash, the market does not

crash again– Almost always we see a rally of 1 to 2 years and then

a trading range– This is what happened 1937 – 38 rally and 1973 – 74

rally– This rally started March 2009 so ………..– The first part of the trading range could still be a

decline of 25%

Establishing the Portfolio• Diversification across the entire market is a grossly

flawed approach– It indicates lack of effective research or recognition of the

patterns– However we do want some diversification within our

chosen sectors• Our primary aim is to identify as close to the start of

a major run as we can with the lowest degree of risk– Missing the first bit is irrelevant if we have stronger

confirmation that move is underway

Establishing the Portfolio• Recommended approach– Establish a core portfolio in great stocks & hold them

unless the fundamentals change– Actively manage the other portion by taking profits

when prices reach extremes of overbought– Re-load on significant dips or the bottom of a trading

range– You may take 6 months to build your portfolio

Establishing the Portfolio• Quick exercise– Size of your investment funds– Desired number of positions to manage– Based on 12 to 15 investments are parcel sizes large

enough to support a core holding and a more active portion

– What management routine can you EASILY commit to

Investing Where the Money Is?• This is still the early stages of a commodity super

cycle– Urbanisation & industrialisation of China / India is

unstoppable

– Central Bank policy creates inflation of hard assets

Investing Where the Money Is?• Buying commodities stocks now is similar to

buying stocks in early 1990’s– Dow had nearly quadrupled from 1987 to be at 3000

points and many thought it was over, but …..– Quadrupled again in next 9 years

The Case for Precious Metals• This is a simple question of supply and demand

and does not require speculation for gold & silver to rise in price– Supply is relatively fixed– Demand is increasing quickly on numerous fronts

The Case for Gold• Supply side– Mine output flat for 7 years, the easy gold has been found– Mine grades are slowly decreasing globally– Miners stopped forward selling– Central Banks changed from sellers to buyers (Asian

governments very low % of foreign reserves)• Demand rising quickly– As an investment alternative to fiat currency instability via

physical ownership & ETF’s– A more affluent Asian middle class

The Case for Gold• Facts on China & gold– Largest gold producer but still imported 6.7 million oz

in first 10 months of 2010 which was 5-fold increase over 2009 imports

– It’s not jewellery, it’s investment demand– Retail ownership now being heavily promoted in a

regular savings scheme with projections to reach 10% of global production

• India & China demand together = 50% global production

The Case for Gold• On top of the physical demand– US dollar falling so gold must rise– Inflation is developing – The takeover trend is in full swing

• Gold bars very hard to get• The companies– Too numerous to list– We are utilising an extensive database to get the real

facts on what is good and what is hype

The Case for Silver• Supply / demand situation even worse than gold– Total value of global market is only $33 billion– Industrial uses expanding rapidly and in most of them the

price of silver is irrelevant so much higher prices will not tend to destroy demand

– Unlike gold much of production is consumed– Making a comeback as a form of money

• Supply side– 25% shortfall to mine production so balance has been

coming from scrap but those sources are rapidly declining

The Case for Silver• Price momentum– Technically $41 to $50 is the all-time peak – Estimates beyond $100 on traditional gold / silver

ratios are not unrealistic• The companies– Silver has been a by-product but that may change– Limited plays that are majority silver producers– CCU, AYN, BHP, CJO, SLW

The Case for Copper• The essential base metal & barometer of economic

activity, especially urbanisation– it is a forward predictor of economic activity– There is little direct substitute– Price has recovered 350% from GFC without the big drivers of

US housing and autos• China now at major inflection point in demand

– This is where demand really accelerates– RIO said it expected global copper consumption over the next 20

to 30 years to exceed the total historical consumption to date.

•

The Case for Copper• Supply

– Where is the massive supply response that normally goes with highly profitable commodity prices?

– Deficit of new major mines on horizon– Demand is rising so quickly that small mines can’t bridge

the gap• Takeovers

– The same story here where takeovers are highly attractive to the bigger players

– This ensures a supply squeeze because that just rearranges the deck chairs in production

The Case for Copper• The companies– Mid-tier producers like PNA, EQN– Small producers like ABY, SRL– Developers like DML, TGS, SFR, RNI

The Case for Energy• Oil

– Peak oil is here now or close by• LNG

– Just had a massive lift because of Japan• Coal

– Will continue to be base load– China electricity 80%, India 70%, US 50%

• Uranium– Will remain part of the energy mix– It has to

The Case for Service Companies• The most reliable way to play the boom– Not the same massive upside as emerging resource

projects but revenue streams & growth options are strong

– Still huge variance in performance between the various players

– ABARE projects $55 billion capex in mining industry

The Case for Service Companies• The companies– Large diversified players like LEI, MND, UGL– Smaller specialists like FGE, MCE, ASL, DCG

Buying Small Resources• There is a formula to drastically improve your

odds of success– No substitute for backing the people– Size, grade & mineralogy of resource– Low quartile producer– Infrastructure– Funding arranged– Blue sky potential– Commodity demand / off-take agreements– Closer to production de-risks the project

Buying Small Resources• There is a price cycle as projects move through

discovery to production– Important to understand how that cycle works– Plus the inevitable takeover potential

The Engine Room• The fundamentals– Stockdoctor scans– Industry knowledge– Selection panel agreement

• The charting– Everything with merit lives in a dedicated watchlist– Entry points based on a combination of attractive

valuation and technical rationale– Either entering at key support or on a signal that the

move is underway

Ongoing Information• The services– Monthly video & written report– Monthly Q & A webinar– Members forum

• Your task– Monitor your portfolio weekly– Digest the monthly video & report for new

opportunities and active management actions– Ask questions via the webinar &/or forum

Case Studies• Arb Corporation (ARP) • Forge Group (FGE)• Ramelius Resources (RMS)• BHP Billiton (BHP)• Super Cheap Auto (SUL)

Brokers• CMC stockbroking• Macquarie Prime• Any other on-line broker

Conclusion• This really is the opportunity of your lifetime to

get this right and generate significant wealth– Ask questions if you need assistance, but have a bit of

a think about it first– Stand outside the noise of the crowd– Focus & clarity on what we are doing