Understand the risk and don’t be too quick to follow investment trends

Steve Bolack is not your typical Curious Investor. He’s been working in the market for over 15 years.

But Steve’s approach to investing is identical whether he is building portfolios for clients or himself – do your research and always look at the risk. He’s not a huge fan of investing in trends, so you won’t see him with a virtual wallet full of bitcoin.

Steve Bolack tells Buffy Gorrilla where he’s gone wrong, the number of books on his ‘to-read’ list and how the market hasn’t changed in 300 years.

Steve tell me a little bit about yourself, what are you up to at the moment?

Buffy, I work as what’s called a proprietary trader. What that essentially means is I work for a company where I trade their capital using my own models in the market for different markets, and different products in the market and so forth.

How long have you been doing that?

Actually, just getting onto three months at the moment. I worked as a stockbroker for 15 years in Brisbane, and this opportunity came up to work for this firm. I sat down with them over a period of a couple months. I looked into it quite deeply, fell in love with the role and haven’t looked back since.

Tell me a little bit about these models you’ve developed what are they based on and how do they inform your investment decisions? Can they be applied to everyday investors?

That’s a very good question that, because when I originally got into the market in ’98 it was coming into the height of the whole dot com bubble. Like a lot of other people, I was drawn into the technical analysis side of the market. I was drawn into big gains, fast gains all of that sort of thing. In the early years the focus was really on just purely technical analysis, but what I was finding when the dot com broke is that the fundamentals are what really counted at the end of the day with all of these companies. A lot short term technicals both positive and negative would actually be broken and they’d run quite aggressively in the opposite direction. It really threw the analysis into a bit of a spin when you’re purely technical, and then the fundamentals are really what’s driving the share prices at the end of the day.

Over the course of really 10 years, I went full circle and started off with technical analysis being a stockbroker that led me into having a very strong fundamental focus on economies and stocks, and commodities. Then fundamentals will also be impacted on by larger economic macro themes at the end of the day, so my studies ended up moving more into economic analysis. Really at the end of the day to make money consistently and successfully you have to sort of embrace, all three disciplines. Just bring them all together to find the best middle point in your investment decisions and that’s really what makes money at the end of the day. I don’t think you can really heavily rely on just one or the other, there’s a lot of fundamental recommendations out there at the moment.

A lot of the analysis is very sound and very good but when you look at the physical charts themselves they’re still very much locked in down trends. There’s obviously still more selling pressure going on than buying pressure. The technicals will then come into it so when the fund managers really start finding a bottom for these stocks and the buying pressure starts taking over from the selling pressure, that’s what you’ll actually see in the charts. That’ll come back to more of a timing mechanism over a qualitative mechanism if you like, if that makes sense.

Are you self-taught or did you study this at school, or have a mentor that guided you through all of this?

God I really wish I did have a mentor. Actually the funny thing is when I got started in stockbroking especially there were no mentors, there were no guidelines, there was nothing. When you sat through your exams, your exams were more about the legal framework of the markets, not so much, which ratio is better than another ratio and how do you read charts and that sort of thing. I actually took myself off to FINSIA, as it was known as back then. It’s the industry body that provides education, for the financial service’s industry. I sat down and I did two things, I did a diploma in financial markets, which is exactly what it says. It kind of covers all the market products there and the different theories and valuations that live behind those markets. I also did a diploma in technical analysis.

Those two studies are what really created a solid foundation for me and appreciating markets, and working on some sort of decision making process, in what to invest and what to stay away from. Those two courses were very much worth their weight in gold so to speak. I came away from those with a lot of insights and knowledge. I’ve never stopped reading, I’ve probably got a book list that’s almost a 1,000 books long and covering everything from economics, to technicals, to fundamentals. There’s always some new angle, there’s always some new perspective to take on board when looking at markets, because markets are always changing. They’re never ever static, and even if you go through previous cycles of booms and bust although there’s a lot of consistency between them, the underlying mechanics are still somewhat different from the previous boom and bust.

That’s what I mean by markets are always evolving and changing, so I’ve always got my head buried in books and I’m always talking to other professionals and getting their take on markets and what their thinking is. The learning curve just never ever stops, you just buried into it all day every day.

Are you mentoring or being mentored at the moment?

I think in the environment that I’m in everyone is just naturally bouncing ideas off each other. You’re always immersed in the centre of the market in what people are thinking, the decisions they’re making, the analysis that underpins those decisions. It is very much a learning curve and you’re drawing that learning from all multiple sources but in the strict sense no, there’s no mentor that sits beside me. There’s no one that I’m mentoring at the moment, and that’s really why I chose at the very beginning to get into the industry professionally. Because I knew from the outset if you’re going to learn something properly you really have to be in the centre of it. It’s like learning how to build a house from the theory books without working in the building industry, and learning all the tricks of the trade. Financial services or trading markets are exactly like that.

Have you made any mistakes in your time Steve that you care to share?

Absolutely, I’ve probably made every mistake you can read about in the books and even now you tend to jump the gun, or you tend to second guess your own analysis, or you tend to second guess what the market’s going to do next. They’re just emotional things that draw you into the market.  I think it can be pretty dangerous to have an absolute conviction on one thing or another in markets. But I have made heaps of mistakes, mistakes from acting too quickly, not researching something deep enough, making assumptions, listening to the wrong people, following the wrong advice. Boy, oh boy, and that’s the funny thing, I think if someone sat down and wrote a book on all the mistakes that can be made in a market I think it would be a best seller, because there’s a lot of them there. Even that in itself, that’s all part and parcel of the education process.

A good example is there’s a lot of narrative out there about the whole gold sector that if the world markets, sort of, roll over gold will head up. If you look at the fundamentals there’s actually more gold being produced globally than what’s being consumed and a lot of that consumptions being drawn in by jewellery. You’ve got to weigh up the fundamentals against the psychology, and that in itself is a whole bunch of lessons to be learnt from that. Short answer is yeah, made heaps of mistakes through the years, very definitely.

Thank you for your honesty. How do you weigh up your investments when you’re going in, either as a professional or as your personal investments?

I treat them all exactly the same way, I have software that does all the number crunching for me so every night or morning, I’ll turn on my software package and I’ve got my own criteria that’s keyed into the computer. I’ll tell the computer crunch the top two hundred stocks today and find me a short list of companies that meet X, Y, Z criteria. That may produce a list of maybe 100 stocks to look at and then visually I’ll run through each of the charts of those stocks just looking for those setups that I recognise to be quite optimal, or quite good. That list will then come down to maybe 10 stocks and then I’ll run those 10 stocks through a series of fundamental filters. I’ll be checking debt ratio’s, EPS profiles, catalyst of growth that sit within the company. I’ll just try and get as much as I can, a holistic picture of what their financial situation is and what the story is behind the numbers and where the company’s going.

That process will then take those 10 stocks down to, you know, one or two. Sometimes I won’t get any, or I’ll have to wait a couple of days, but very generally if you’re going through that process every single day. Two things come out of it, you always find something that’s either undervalued or overvalued if you’re tending to sort of go both long and short. The other thing is you tend to see what’s happening across the broader market. A good example, if you go back a month or so ago, every night that I was scanning the markets the property companies the REITs, kept coming up as very aggressive upward trending companies.

Now just in the last couple of weeks we’re actually seeing a reversal of that trend. Getting into the habit of scanning to market every night and visually covering all of those short selections of stocks, it starts to fill in the picture of where the markets sitting at the moment. Which industry sectors are starting to move, and it’s a very good habit that I think investors need to get into but you’ve really got to set aside a couple of hours a night, minimum to be able to do that.

If you don’t have access to a platform like, I’m assuming you do because you are a professional. How would you recommend people have that ease of analysing the stocks that they might want to invest in? Do you have any tips?

To be very honest there’s no free way of actually doing it effectively. In the world we all know you get exactly what you pay for. When start using free tools you’ll find that the functionality is very limited, they very clunky to use. I suppose the cheapest way, I’ve just recently gone through this exercise looking at all the software provided out there. I think unbiasedly, I don’t own MetaStock but I think that’s probably a software package that I think has lot of merit. That’s mostly because of the data fee’s, when people are buying software packages it’s not about the upfront costs. It’s always about the data fee’s, because the data fee’s are what will kill you in terms of your month to month, cash flows. I think when I was looking at MetaStock several weeks ago, I think for the Aussie market you’d be paying something like $35 a month, just for the Aussie market.If you wanted the global markets, I think that comes in at something like a couple of hundred dollars a month. I think MetaStock probably offers great value.

Other people have said to me that, Incredible Charts is worth a look. It’s an Aussie firm and they make end of day data available for about $30 a month. I think that also includes US data as well. Again they are two packages I don’t own and I don’t use, but I have sort of looked into both of them and especially that second one. A few people have recommended to me that’s a pretty good starting point.

I would also like to clarify, not endorsed by the Constant Investor as we have not ever researched those either, just in case! A public service announcement from Steve and Buffy.

Yeah, we don’t endorse these products.

What sort of stocks are you looking at at the moment and seem interesting based on your analysis?

Buffy when I build the portfolio I’m always thinking of risk, whether it’s personal or professional. You’ve always got to be asking yourself what’s the downside? A really good example of that is there’s a few companies I’ve bought just literally in the last three or four days, and the fundamentals read well, the numbers stack up, the technicals look good. As soon as you buy them they don’t just turn the opposite way, they turn the opposite way in a very aggressive manner, they just get dumped.

That’s when your fundamentals really come into play, because a lot of people who are pure technicians might look at that and be shaken out of the stock and turn and move away to something else. Through the years I’ve seen how these aggressive moves can turn around on a dime, so to speak, and reverse back up in the direction that you originally thought they would move in. Sometimes you’ve just got to sit on the side of the fence, let the market gyrations play out and just stick to the original reasons that you got into the stock, or got out of the stock for that matter.

You mention this list of 1,000 books on your bedside table, one you must have a very sturdy bedside table, two what are some of those books? What could we be reading to make ourselves better informed investors?

Do you know Buffy I got a spreadsheet it’s about a 1,000 books deep, and I literally went to Google and typed in best of books, or best list, and company? All your big, publishing houses and financial houses they all produce these best of 100 lists. I literally went through those, and I also went through Amazon looking for certain topics. The key thing that I do when I go to Amazon I do read the reviews, I like to read those. I specially go to the one stars first, a lot of people will naturally gravitate to the five stars, but I always go to the one stars. I like to know why people don’t like a book, and sometimes the key valuation for buying the book will live inside those one star ratings. Some of the five stars the ones that give a deeper multi paragraph explanation they’re also good to read.

I also look at the table of contents, the more time you spend in the market the more you start to, understand what it is you’re looking for in a book. I always go through the table of contents, so that 1,000 odd book list has been a combination of going through best of list that I’ve come across on Google. Book review recommendations, going through tables of contents, and just going through book reviews themselves on Amazon. It’s just been a collection of all of those titles put together. What’s really interesting is that more so in Australia and the UK than US, we had this new product that’s called CFD that’s been around for, I don’t know, six or seven odd years.  I’ve just finished reading a book that was written in 1688 and it was on the Amsterdam Stock Exchange. It’s the first book that I can find on financial markets, so it’s about the Amsterdam Stock Exchange. The book is essentially a conversation between three people, a merchant, a shareholder and I forget who the other person was. The shareholder is explaining to the other two people what the stock market is all about, and all the games and the tricks that are played on the market.

Buffy, I can tell you, reading through that book, it was so amazing because everything that I’m reading in this book that was three, four hundred-odd years ago is exactly what happens today. The reason I mentioned CFDs is that they actually had CFDs on the Amsterdam Exchange back in that point in time. They gave it a different name of course, but the description on what it was, being a derivative of the larger product, and it’s not directly quoted on the exchange, it’s created by market makers who are off the exchange, it fitted the bill exactly. So in that sense, there was really nothing new under the sun.

I think that sounds a little bit depressing, after 400 years there’s been no evolution in the stock market or investing.

You’re right when you say that, but there is also a level of consistency, so when you understand how human nature works, I was watching a video just a couple of days ago, and the commentator was talking about bitcoin. Now, I don’t know too much about bitcoin, I’m still trying to get my head around it because it doesn’t actually exist. It’s not like a chunk of nickel or a chunk of gold, that you can hold in your hand, you can store it, pass it on.

Bitcoin is completely virtual, so I’m still trying to understand it, but this commentator went through to say, “You watch, when bitcoin gets over …” I think it’s 2,000 dollars a coin or something, he said, “You watch the mad rush. Everyone, through fear of losing out, will jump on the back of this bitcoin, and they’ll push it to astronomical levels.” And he said, “That’s just a future bubble waiting to burst.” I sat back and I thought about it, and I realised this guy is probably dead set correct. I should not be rushing out, this is me personally, to put money into something that I don’t understand. That’s probably the first rule of investing, never ever ever ever put your money into something you do not understand. You’ve got to spend a bit of time, buy a few books, talk to a few people who are involved in it, really get to know the product or the asset very well before you commit real money to it.

Steve, what a great chat. Thank you very much.

Thanks for your time, Buffy.