hiriskpaul wrote:As an extreme example of why not to sell after a quick 20% gain, I bought into Premier Oil bonds last year. Premier Oil were in big trouble following the collapse in the price of oil and was teetering on the edge due to a very large debt pile, but they had, in principal, agreed a restructuring with creditors. As part of the restructuring deal, I was given some warrants, which are exercisable into ordinary shares. Following the restructuring, the warrants quickly climbed by 20% and I could have taken a very quick profit, but they are now up over 500%, so I would have missed out on a substantial return over 1 year just for a 20% gain, albeit a quick gain. Studies of retail investors have found this "quick buck" behaviour is very common, as is panic selling, and as a result retail investors tend to underperform their investments by inopportune trading.
Hi Paul,
I hope you don't mind, but seeing as Mel and I are still quite new to investing; I have been analysing our behaviour regards our sales of TUNE and CCC again after they made a quick 20% gain, whilst I agree that perhaps we could indeed have held out for 500%; but however that action (holding) would have been very speculative. (And unlike the the PMO bonds, the above equities were fairly high priced in the market, so the comparison you made is not that exact). However, the fact that we stood to make 20% (which annualised would be ~120%) was a cert, that is an example of a bird-in-hand etc. etc.
Furthermore, we then had our money back, which being already inside the ISA, could just be reapplied with very small charge to a new purchase, which with the balance of probabilities then may benefit a similar 20% or 500% rise - again all speculative at this point.
Although, I'm fairly new to private investing, I have been a keen observer of economics and the markets for a couple of decades. My view is that asset prices largely abstract and quite often bear very little reflection of reality. Asset valuation, in my naive opinion, is a very vague, I have read a lot of ARs in the last few months, and I have worked in corporate IT for 25 years; and a lot of what the board states in ARs or I have personally heard CEOs/FDs say, is very often fluffed-up nonsense, they always hype the good news, hide the bad, present KPIs (e.g. ROCE, FCF etc.) each using their own interpretations which glam up their individual business. Furthermore the market place is fickle is usually overreacts to news. As such, the buying and selling shares seems comparable to trading haphazardly priced virtual pieces of paper.
With the above in mind, this is how Mel and I are trying implement our equity purchases currently:
1. Avoid buying heavily indebted companies (by focusing on KPIs like interest cover, net debt/EBIT etc.). (We made an exception with DTY, since it's debt is fixed rate, and market is reasonable predictable, and it's stock looks underpriced).
2. Always buy firms with a dividend paying history.
3. Try to buy firms with good operating margins, ROCE and cash flows.
4. Try to buy firms with predicable markets, and hopefully ones that offer something unique.
5. Avoid firms with bizarre looking financials, lots of goodwill, lots of acquisitions. I recently reviewed TATE, DCG, MCRO, SGE, and GSK (all over the 2014-17 period), they all had varying degrees of this; in some cases I found their cash flows very weird with some years distorted by a big acquisition, and various loans coming in, going out, sales of harvested acquistions etc.
We really desire fairly predictable income, that's we always buy a div paying stock. I also think a stock which has little debt and pays divs will be less painful when the market next collapses.
So we are really trying to blend reasonable dividend paying shares that will hopefully survive a recession, and smaller firms e.g. AMS, BUR, TRI, BOY, which have minimal debt, higher profitability, with lower divs which should increase with time, probably along with their share price.
We see our portfolio as a mix of grown up (with some debt, but hopefully not too much) companies paying between 2.6-8.0% dividend yields and smaller firms which we think will either grow their dividend yields, or provide us a capital gain (due to market fluctuation) in the meantime.
Forgive me, if I seem pompous, it's unintentional, we are just trying to figure out a strategy that we find sensible/profitable.
Matt (and Mel)