M & M's First Portfolio - Strategy Ideas?

[ermintrade]

I have to say that I sometimes do indeed take the profit if a share jumps 10 to 20% for no explicable reason. I do not sell all the shares, just top slice the sudden profit. Then I can sit on the cash for a while and if the SP in question drops back, buy some more at the lower price. Or alternatively, take the opportunity to do a bit of rebalancing my portfolio.
This strategy means that you do not prematurely sell out of companies which go on to be real winners over the long term.
Regards
ermintrade

[simoan]

I have to say that I sometimes do indeed take the profit if a share jumps 10 to 20% for no explicable reason. I do not sell all the shares, just top slice the sudden profit. Then I can sit on the cash for a while and if the SP in question drops back, buy some more at the lower price. Or alternatively, take the opportunity to do a bit of rebalancing my portfolio.
This strategy means that you do not prematurely sell out of companies which go on to be real winners over the long term.
Regards
ermintrade

That's fine - top slicing on the way up stops the size of a position getting too large so is good risk control and a sensible part of a known winning strategy. In the Art of Execution this is "Connoisseur" behaviour. Snatching a profit by selling out of a share completely (that you have probably spent hours researching) just because the share price rises 10-20% is not good for long term positive returns. There's so much evidence that this is the case it's not funny.

All the best, Si

[melonfool]

Hmm, if your criteria have ruled out Tate and GSK you might want to think again.

I don't know what the others in that sentence are though - it is the convention to write the full name as well as the ticker, or even just the full name, but not just the ticker.

Mel (the other Mel)

[simoan]

Hmm, if your criteria have ruled out Tate and GSK you might want to think again.
Mel (the other Mel)

Why should M&M think again about GSK and TATE?

M&M have made it clear they are developing a process for identifying quality shares with growth prospects and as such are quite right to question lots of horrible goodwill and acquisition related intangible assets on the balance sheets of TATE and GSK. Of course, if they want to take a different approach (one that shall not be named) as espoused on numerous other TLF boards, then they probably wouldn't bother looking at the balance sheet at all.

All the best, Si

[hiriskpaul]

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.

I often think that one of the best things an investor can do is to forget what they paid for an investment. The point is, the price paid for an investment has no bearing on what it is worth at a later date and is of no help in risk assessment. It is just a distraction that can lead to emotive decision making, such as selling too early or holding on after a price drop just so you can get your money back.

I think you are trying to identify companies with good long term prospects with low risk (low debt, dividend paying, profitable, etc.) and I think are prepared to invest for the long term, yet your actions are those of a speculator. A 20% gain is really here nor there for a small company and movements like this are to be expected. Why do you consider holding after a 20% gain to be speculative? It might be, but if you have not ascertained the reason(s) for the gain, how can you form an opinion as to whether it is speculative? Are you sure you were not just fearful of losing what you have gained? i.e. acting on emotion.

I would point out that there is nothing particularly wrong with speculating, but you need to be clear what you are doing - long term investing or speculating. Many of my investments are highly speculative in nature, with the likelihood of high price movements in the short term and the possibility of substantial losses. As a recent example I bought Provident Financial debt after some operational hiccups. I have no interest/opinion in the long term prospects of the company, I just thought it highly likely the company would survive with no need for debt restructuring and the price of the bonds would recover. I was speculating, not really investing.

[simoan]

I often think that one of the best things an investor can do is to forget what they paid for an investment. The point is, the price paid for an investment has no bearing on what it is worth at a later date and is of no help in risk assessment. It is just a distraction that can lead to emotive decision making, such as selling too early or holding on after a price drop just so you can get your money back.

This is great advice. "Anchoring" on a price is just about the most powerful bias any investor has to overcome. It's one of the reasons it is so important to have a rules-based process for buying and selling and sticking to it. Sometimes you get it wrong through no fault of your own (i.e. you buy a share the day before a bad profit warning that could not have been foreseen) and using the current share price as an anchor makes it very difficult to make the right decision on what action to take - that's loss aversion for you!

All the best, Si

[Dod101]

Out of around 30 holdings, including Investment Trusts, I have almost certainly held more than half of them for upwards of 20 years. From most of these, I have long since taken out my original investment and bought something else, leaving the balance to multiply, and I have the satisfaction of feeling that it has cost me nothing. As has been said, if you buy a share because you regard it as a good share, 20% up (or down for that matter) is neither here nor there. With investing I think you need to look at least in 5 year cycles, and so unless the outlook has radically changed, that is what I would regard as a decent holding period. In fact I have a concrete example. I bought Henry Boot on 19 January 2017 at £2.050. It reached just over £3 six months later and has more or less stagnated ever since. I should probably have sold with the 50% gain in the bag but I still hold because I like it as a share and I expect it to continue upwards over the longer term.

My main portfolio is a modified HYP but no matter. What is important is to have a strategy and stick to it. M & M's may be to take 20% gains when offered. That is fine but it has been shown time and again that most people will lose money that way. But that is why I said earlier that experience is the best teacher.

Dod

[melonfool]

Hmm, if your criteria have ruled out Tate and GSK you might want to think again.
Mel (the other Mel)

Why should M&M think again about GSK and TATE?

M&M have made it clear they are developing a process for identifying quality shares with growth prospects and as such are quite right to question lots of horrible goodwill and acquisition related intangible assets on the balance sheets of TATE and GSK. Of course, if they want to take a different approach (one that shall not be named) as espoused on numerous other TLF boards, then they probably wouldn't bother looking at the balance sheet at all.

All the best, Si

Think again about the criteria, not those shares specifically.

Tate isn't particularly high yielding so, despite your snarky comment, that was not what I meant.

If the strategy is to exclude well performing shares that have a history of decent growth, plus some income, along with a generally (as far as possible) stable outlook - well, fine. It's not a strategy I'd want.

I suggest another look at the criteria. I've read most of the thread and it's clear there is some confirmation bias involved in the 'strategy', so if only for that reason it needs to be analysed more carefully.

Mel

[simoan]

Think again about the criteria, not those shares specifically.

Tate isn't particularly high yielding so, despite your snarky comment, that was not what I meant.

If the strategy is to exclude well performing shares that have a history of decent growth, plus some income, along with a generally (as far as possible) stable outlook - well, fine. It's not a strategy I'd want.

Well, that's for M&M to decide, but whether you believe TATE and GSK have a "history of decent growth" or not is surely dependent on when you bought them? M&M are looking to identify quality growth shares with high ROCE, free cashflow etc. I don't really see how either TATE or GSK qualify on any of these measures. From a share price growth perspective they have both been below par investments over a long period of time.

I suggest another look at the criteria. I've read most of the thread and it's clear there is some confirmation bias involved in the 'strategy', so if only for that reason it needs to be analysed more carefully.

Mel

I don't understand, where's the confirmation bias? M&M have laid out the criteria for an investment strategy they are looking to put in place and are asking for ideas and people are offering opinions and advice. 'That is all.

All the best, Si

[TheMotorcycleBoy]

Thanks for all the replies, folks! I'll try to get through commenting on most of them before the real day job has to start.

I think the tendency to view your final point, where you see re-invested cash (following a sale of something that's risen quickly) as likely to go into something that's also then likely to continue rising from your new point of purchase, is perhaps clouding your judgement here.

Maybe.

If you agree that capital freed up following the sale of something that's risen quickly is just as likely to go into something new that may well go down from that point, then you might come to a different conclusion...

Assuming that company 1 and company 2 both have identical growth/profitablility/blah prospects, then isn't it all just an issue of probability...?.....What's stopping company 1, from falling after the quick rise. In our case with our sale of TUNE that's exactly what happened. It's still less than our sale price. (Not so with CCC, which has continued to rise.)

I thought you had read the "Art of Execution"? What you describe is classic "Raider" behaviour which is a losing strategy over the long term. If you combine it with "Rabbit" behaviour...

We have read AoE. We don't intend to exploit the Raider as the bulk of our activities. And we'd never be a rabbit (with an individual stock) - only if the whole market collapsed. Make sense?

Hmm, if your criteria have ruled out Tate and GSK you might want to think again.

I don't know what the others in that sentence are though - it is the convention to write the full name as well as the ticker, or even just the full name, but not just the ticker.

I ruled out Tate mainly because I found their books very hard to decipher. There were a lot of acquisitions and disposals (ExoStarch or something?). Also from subjective perspective, sugary products will incur more tax etc. in the future (we've heard).....as the "hit the market" rather than the "behaviour" brigade take over with rising childhood obesity.

GSK, for 2017 net debt = 13.2B and net income = 1.5B. Wow! What will happen if rates rise? Is their debt on any floating rate? Where does the div get funded? I don't know......we are new to this. But it looks scary.

Sorry I was being lazy writing just the ticker; the others I reviewed with disappointment:

DCG - dairy crest. Interesting and hopeful recovery after disposal of the milk producing (lossy) part of biz back in 2016. Diversification into new areas (baby milk, and flogging cheese to Asia). Have much possibility. But big debt, and worse the debt has covenants attached. They are very machine intensive and have significant unpredictable costs (e.g. milk)

MCRO - micro focus. A serial acquirer. Interestly they have a building next one of ours. (Which was Autonomy, then HP enterprises, now is mcro). They just acquire softwarey firms, try to glue bits together, keep what they like, then dispose. We liked the possible div yield ~4%. But the business model seems horrid to me.

SGE - sage. Good margins, ROCE, but falling over with acquisitions and goodwill. They are boasting about a new "cloud" accounting product. But this just seems like money for old rope....wrap up an existing product, host on a virtual machine in the cloud. I'm sure many others can and will do that, probably more competitively.

I often think that one of the best things an investor can do is to forget what they paid for an investment. The point is, the price paid for an investment has no bearing on what it is worth at a later date and is of no help in risk assessment.

Indeed. I'm not sure that that isn't already part of our agenda.

What are your view on consideration of buy price?

Seeing as Mel and I quite fancy SPX and NXT shares we should just buy them now, despite them both being very pricey (esp. spirax, next might be starting to fall)?

Buying at "any price", is a sure way to reduce one's dividend yield. Surely.

yet your actions are those of a speculator.

More of an opportunist in the TUNE and CCC scenario. Or a raider as Simoan put it. Generally we don't buy on a speculative basis (exception is recent DTY purchase, but if it does not rise fast, we'll hang for divs), we are buying for long term income, hopefully.

If you re-read the first 2 bullet points of
viewtopic.php?p=152034#p152034

you'll see why we sold those stocks. But we didn't buy those stocks as raider-style speculators.

Anyway, thanks again for your inputs. If you are wondering why it's mainly me (Matt) doing the writing now.....Mel's just got more paid work, and isn't getting as much time to post. In terms of analysis, I'm spending some time on the figures and Mel's doing a lot of the actual reading and research.

better get to the day job!
Matt (and Mel)

[TheMotorcycleBoy]

I have to say that I sometimes do indeed take the profit if a share jumps 10 to 20% for no explicable reason. I do not sell all the shares, just top slice the sudden profit. Then I can sit on the cash for a while and if the SP in question drops back, buy some more at the lower price. Or alternatively, take the opportunity to do a bit of rebalancing my portfolio.
This strategy means that you do not prematurely sell out of companies which go on to be real winners over the long term.
Regards
ermintrade

That's fine - top slicing on the way up stops the size of a position getting too large so is good risk control and a sensible part of a known winning strategy. In the Art of Execution this is "Connoisseur" behaviour. Snatching a profit by selling out of a share completely (that you have probably spent hours researching) just because the share price rises 10-20% is not good for long term positive returns. There's so much evidence that this is the case it's not funny.

All the best, Si

You could argue, that we were top-slicing! Seeing as we only had ~1000 in that stock, it didn't seem cost-effective, to sell any less than that amount. That is, the top represented the whole damn thing.

Had we had 10,000 in that position, then we would have probably taken an approach identical to the Connoisseur concept. e.g. flogged off 50% of the holding.

But we don't have as much money down as some of you....

[bobsmydog]

Hi Mel
I have survived several general stock market crashes and a 'hang on in there' approach seems to have worked for me (and it also provides an opportunity to add - I always have cash ready for such an event).

However I am mainly invested in funds and ETFs, not individual shares, and I think I might treat these differently. If a share is crashing and the market isn't then that is more worrying.

My 'hang on in there' with funds doesn't always work though eg Framlington netnet during the dotcom crash. Oops!

[TheMotorcycleBoy]

However I am mainly invested in funds and ETFs, not individual shares, and I think I might treat these differently. If a share is crashing and the market isn't then that is more worrying.

Many thanks Bob,

To be honest it was the "a share is crashing and the market isn't" issue which was one of main queries on this thread. And one of the ones on which we received the sketchiest of answers. (I believe that's because the majority of the audience are more long term investors than short term speculators but that is conjecture on my part).

Obviously there are different psychological viewpoints, e.g. hang on to that errant stock with hope of recovery or cut losses. And in our investment virgin voyage we'd been recommended a book called "The Art of Execution"; which describes a few "investment" personality traits. A (much argued about) strategy called the "Assasin" is mentioned....where a "stop loss" is set e.g. 10% - 30% on purchase and the trader sells (cuts loss) at this point. Indeed in the "the Naked Trader" by Robbie Burns, Robbie describes how he follows this:

Indeed if you follow this and click the disclaimer at the bottom, you can see some of his portfolios and the stop losses, I do believe.

http://nakedtrader.co.uk/

I'm also led to believe that the stop loss thing to applied on a rising stock too, e.g. you have a stock currently +35% and you wonder if it may continue, but don't want to continuosly monitor it, then you set a sell limit at +30% (or whatever) to safeguard your profit.

etc. etc.

Matt and Mel

PS My current conclusion: ignore the book and go with your gut feelings!

[Dod101]

I will jump in here not having contributed a lot on this thread so far. Going with your gut feeling is as good as anything as a guide. If one share is crashing (even just drifting downwards) and the market in general is not, that in itself is not a reason to sell but it is a reason to take a look and think why. For instance it might be that there is a sectoral problem (Banks in early 2008), maybe it is an indication that the market expects trouble with the dividend or something worse, it might be a problem with a big contract; any number of reasons - or of course no reason; the share has just gone off the boil.

If I may say so I think, M & M, that you are trying to do too much at once. For instance the Art of Execution is a fairly sophisticated book and really you need a bit of experience to get his message. You asked about derivatives in company accounts on another thread. Fundamentally I do not think you need to worry too much about that at this stage (if ever!), likewise company taxation. What you need to be successful investors in my book I do not know, but you do need to be able to read the market to some extent, to pick up problems if you can (gut instinct) and have a clear idea of the sort of companies you want to hold. A trading strategy does not need that because you will be in and out of shares very quickly and they are no more than bargaining or, some would say, gambling chips. That is not investing though.

For my money in the early stages of investing, Warren Buffet's letters from Berkshire Hathaway contain most of what you need and it is well worth spending a lot of time reading and absorbing them. Unless you have the inclination, time and energy it is hardly worthwhile analysing company accounts line by line or you will be unable to see the woods for the trees. You are surely wanting to familiarise yourself with the woods at this stage.

Time and experience in the market is a great teacher.

Hope all of this helps

Dod

[TheMotorcycleBoy]

Hi Dod,

You asked about derivatives in company accounts on another thread. Fundamentally I do not think you need to worry too much about that at this stage (if ever!), likewise company taxation.

The derivatives question was only really about how to classify "Derivative Financial instruments" in ARs, i.e. whether they should comprise a debt calculation. We'd never dream of investing in derivatives. And the tax question was more one of personal interest, TBH.

What you need to be successful investors in my book I do not know, but you do need to be able to read the market to some extent, to pick up problems if you can (gut instinct) and have a clear idea of the sort of companies you want to hold. A trading strategy does not need that because you will be in and out of shares very quickly and they are no more than bargaining or, some would say, gambling chips. That is not investing though.

Agreed.

For my money in the early stages of investing, Warren Buffet's letters from Berkshire Hathaway contain most of what you need and it is well worth spending a lot of time reading and absorbing them. Unless you have the inclination, time and energy it is hardly worthwhile analysing company accounts line by line or you will be unable to see the woods for the trees. You are surely wanting to familiarise yourself with the woods at this stage.

Maybe. FWIW I'd heard that Mr. B. really goes to town studying firms and their financials and the credibility of their management.

Time and experience in the market is a great teacher.

Yes. A.k.a. "experience is an expensive teacher, I hope you can afford it" and "experience is what you have when you no longer need it"!

later
Matt

[Dod101]

Mel

Please do not dismiss WB's letters. I assure you behind the folk wisdom there is a huge amount to learn. Let him and others do the account studying line by line, unless of course you think you will be another Warren Buffet. Be cynical about experience if you like but it is I think the only way to go for ordinary mortals. You may not be one of course and if so you do not need to be asking the questions on this forum. You would be telling us.

Dod

[TheMotorcycleBoy]

Mel

To be honest, it's mainly me Matt using the account!! Mel did set it up and chatted a bit at first, but I think she sometimes get a bit overwhelmed! I did think about getting the account name, but IMO it's pretty irrelevant

Please do not dismiss WB's letters. I assure you behind the folk wisdom there is a huge amount to learn

I'm not by any means. I'll probably get the best, and least pretentious relevant book pretty soon, and give it a read.

Don't worry, lots of the books I'm reading on and off do mention his words. And regards "the quality of the management" his words are very astute. Yes I/we probably made an error of judgement re. our PSN/persimmon purchase (i.e. fat cat CEO), but the +8% div yield looked too good to be true.

Let him and others do the account studying line by line,

You've lost me on this one, mate. He's not going come over and do my reading, and I'm not copying his portfolio (or anyone's without just buying their fund). Please elaborate.

unless of course you think you will be another Warren Buffet.

No! But to be brutally frank, whilst it's clear he's a shrewd/clever/whatever, he started out in the 50s, and has experienced many booms and busts. But in particular, he was around in the golden post WWII American "you've never had it so good" times and it still alive today! And compos mentis!

Now please understand, I'm not even thinking of any such comparison, indeed I just gleaned this from the wiki page on him:

Buffett displayed an interest in business and investing at a young age. He was inspired by a book he borrowed from the Omaha public library at the age of seven, One Thousand Ways to Make $1000.[18] Much of Buffett's early childhood years were enlivened with entrepreneurial ventures. In one of his first business ventures Buffett sold chewing gum, Coca-Cola bottles, and weekly magazines door to door. He worked in his grandfather's grocery store. While still in high school, he made money delivering newspapers, selling golf balls and stamps, and detailing cars, among other means. On his first income tax return in 1944, Buffett took a $35 deduction for the use of his bicycle and watch on his paper route.[19] In 1945, as a high school sophomore, Buffett and a friend spent $25 to purchase a used pinball machine, which they placed in the local barber shop. Within months, they owned several machines in three different barber shops across Omaha. The business was sold later in the year for $1,200 to a war veteran.

That's definitely not me. At that age I was either fishing or trying to impress the local girls!

Matt

[melonfool]

or trying to impress the local girls!

Matt

Try this: https://www.amazon.co.uk/Warren-Buffett ... ike+a+girl



Mel

[TheMotorcycleBoy]

or trying to impress the local girls!

Matt

Try this: https://www.amazon.co.uk/Warren-Buffett ... ike+a+girl



Mel

Ha!

I like it.....I'm just getting back into doing some actual work. But seriously - would you recommend this one? Have you read it? Or were you just being silly?

I may well review it tonight back at home, got a Lake District holiday in a week or so, extra reading material, etc. etc.

Matt

[melonfool]

I have read it, it's interesting about how emotions and the way we are socialised affects our behaviour and it concludes that women are better investors.....so I would recommend it!

It's a bit repetitive though, so you can read it quite quickly.

Mel