I’ve had a few shares in the past, but mainly through privatisation of public industries and employee schemes. I had a limited understanding of how it worked and how the market got the value of a company and more importantly the future value.
I retired at the end of Jan 2014. I have no pension for a year, but no mortgage and enough savings to last a year. (just couldn't stand working for short termist bull sh1ters any more) I spent most of my career selling network services to television broadcaster. The last 6 years analysing where the market was going so that the network could be extended into that country before the broadcasters asked. These were channels like Turner, Discovery, Viacom etc. To do this I looked at their decision making process. It sound obvious, but they were led there by their customers and their customer’s customer. If population was getting richer their disposable income would go up, this would attract companies trying to sell them cars, washing machines, holidays and cosmetics. These FMCG's would spend on advertising and that funds TV channels. Oversimplification but you get the idea.
Having a reasonable pot of savings, some of which I was not going to need until the end of the year and with very low interest rates on bank saving accounts, I decided to look at the stock market as a means to grow this pot.
I’ve spent a little over 5 weeks studying. I collated info by experts and analysts and have a reasonable grasp of the theory now. I made some early investments and have gradually refined my decision making. It is by no means perfect and in a market that is generally on the up its harder to make a mistake, but the latter investments are making more than the earlier ones. There is one exception, more latter.
What I've noticed from the analysts is they look at the numbers. Revenue, profit etc and what the company say in the report. There is some reaction to breaking news, but this is again more about what the company says (profits warnings, sales up, restructuring) than a link to wider information. There are a few exceptions, defence is one, where government budgets link back to companies like BA Systems.Other published deeper/wider analysis seem to be amateurs, like me. This is not to say that professionals get it wrong and amateurs get it right, but the decision is yours, so get informed.
Example of professionals getting it wrong. In Feb 2014 they recommend investing in a company that organises exhibitions in Russia and Eastern Europe. The Ukraine was kicking off and no one new how Russia was going to react, but that was a risk as exhibitors and visitors are likely to shy away. The consequence is this company’s shares fell 21.5%, Which says that investors are ignoring analysts.
On the other hand at the same time the professionals where saying that building companies were not a good investment as the new house market had not recovered yet. But the news was that there was the start of a recovery, there were thousands of homes affected by floods and bad weather and talk of billions being paid out by insurance companies. Hummm! So the share price was low for building supply companies. They would be making money out of supplying material for all those repairs and eventually for building houses. Early days yet, but making steady progress.
As well as making decisions as to what to buy, there is also the decision as to what and when to sell. This is harder, as there is a tendency for small investors to hold on to shares as they fall, in the hope that they will turn around. The best way around this is to take the emotion out of it. A bit of research will show that there are several Stops. Stops are price thresholds that trigger you to sell. The first and lowest is called a Stop Loss. This takes the price you paid per share plus the trading cost (buying and selling) plus the stamp duty and is 10% (or whatever you want) below. This means that you will never lose more than 10% on any investment. Couple this with never having more than 10% in any one investment and the most you can lose is 1%.
The next Stop is the ATR Stop. This is the average trading range stop. You have to decide over what period you are going to calculate the average. Some say 40 days and some say 10 days. I’ve gone for 20 days (four weeks). ATR means that if some bad news causes the price to vary (drop) more than it would do on average, you are triggered to sell.
The next one is a Trailing stop this takes the maximum price the stock has got to and says by how much you are prepared to let it fall before selling. I've gone for 7.5%. Each Stop kicks in over time and as the stock goes up in value (hopefully). I’ve only been using this for a short while and not sure what things will affect it (Ex Div) so a little common sense for the time being I think.
I looked at JBL Risk Manager you get a free trial, but if you are a UK investor it is a pain to use. So I’ve built a spreadsheet to manage these stops (and calculate value). I only update the prices based on the last days ranges and have to cut and paste info in. A good way to get the share price info is a free programme “GimmeFreeData”
The spreadsheet only takes 15 minutes to update, but it’s not ideal. Its a flat database and adding/removing stock is cumbersome. I will work on developing a small relational database, hopefully importing the data direct. I also want to be able to put stocks in on a “watch” basis as selling stock will give me cash I will need to reinvest somewhere.
I know this all sounds a bit of hassle (and it was to start off with) but overall I’ve made (on paper) 3% return in less than 5 weeks, so worth looking at. The exceptions are one stock is down 8% but one is up 27%. The 27% gain was one that was just a gut feel, with no analysis whatever. Go figure.
Finally: -
- Never invest more than you can lose
- Never invest money you are going to need in a few months
- Have around 15 different stocks in a wide spread of industries. (This makes it complicated, but not impossible.)
- Never have more than 10% of you total investments in one stock
- Take into account your trading costs (don't keep buying and sell - it will cost you)
- Never hold onto stocks if they break your Stop threshold.
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