Portfolio producing annual capital gains not dividends

[Charlottesquare]

Have you ever heard of diversification? I suspect that you are overexposed to a few shares.TJH

Have you ever heard of "run your winners''? I agree with PastCaring hang on to the good 'uns. I have only had to pay CGT when I have had a 'forced' sale when the other investors in a company have wanted to sell out of a venture capital investments.

I think the "run your winners" mantra is a nonsense. Try telling that to someone who held big positions in say Enron or Lehmans. Running winners is something that is very tempting to do though and I am guilty of doing it myself. I hold a few "winners" now that I would have been better off selling a few years ago and it was largely the unwillingness to take a CGT hit that stopped me.

The most extreme example of running winners I know of is with a friend who has over 90% of his entire net worth in Microsoft shares which produce about 99% of his income. He sells enough each year to utilise his CGT annual allowance. He does admit the level of his exposure is mad, but cannot bring himself to sell more. A combination of unwillingness to pay CGT and giving up on what for him was a winning strategy.

I agree, taking to extremes it can lead to very unbalanced (and high risk) portfolios, circa 1990/1991 the firm I was with had acquired a client who had dabbled in the market for years, the catch was that the portfolio created was totally skewed due to the success of one share and 50% of about £400,000 was in that one holding, my unenviable job was to reconstruct all the holdings for CGT purposes to pass to newly appointed brokers who were then to gradually adjust the portfolio into safer territory.

It can be nearly as bad as the Royal Bank employees who got shares throughout their employment and never diversified, in Edinburgh you meet a lot of them who have kissed goodbye to substantial amounts by failing to diversify, a fact I keep telling my brother in law who still holds far too many Centrica from his near 20 years with them.

[SalvorHardin]

The thing with running your winners is that if you aim to make serious money on the stockmarket then at some stage you're going to have to start running some of your big winners. A strategy of not running your winners can easily lead to a portfolio stuffed full of losers which you end up being unwilling to sell because you don't want to realise the loss (expressions such as "it's not a loss until you sell" have a lot to answer for).

Most of the high flying shares which come back to earth with a thump usually seem have one of more of the following:

1) high levels of borrowings (banks, insurers, property)
2) weak or non-existent moats (commodities, copycats)
3) excessively hyped stocks (dotcoms, whatever is the latest fashion)
4) commodity businesses (mining, oils)
5) operate in sectors prone to contagion (banks)
6) single product/project companies (especially if they operate in a politically unstable country)

When you have a company whose moat that has been breached by new technological developments, such as publishing by the internet or high-street retailers by changing customer habits, local government hostility and the internet, the decline tends to be more gradual (e.g. Marks & Spencer, every newspaper publisher).

If you think you might have too much in one company, a good thought experiment is to see what would happen to your lifestyle if all of your investments in that company became worthless overnight (also if you work there you lose your job with no redundancy pay). If that is going to cause you serious problems then you've got too much in the one basket.

If I hadn't run my huge winners (mostly small cap oils like Soco) I'd still be in work. But when things started to go pear shaped in 2008-09 I chose capital preservation over gains, selling most of my oils and moving the money into stronger moat shares. Nowadays the winners I run are strong moat shares, some of which I first bought over 20 years ago, as my primary strategy is preserving the real value of both capital and income so that I don't have to go back to work!

[hiriskpaul]

The thing with running your winners is that if you aim to make serious money on the stockmarket then at some stage you're going to have to start running some of your big winners. A strategy of not running your winners can easily lead to a portfolio stuffed full of losers which you end up being unwilling to sell because you don't want to realise the loss (expressions such as "it's not a loss until you sell" have a lot to answer for).

Most of the high flying shares which come back to earth with a thump usually seem have one of more of the following:

1) high levels of borrowings (banks, insurers, property)
2) weak or non-existent moats (commodities, copycats)
3) excessively hyped stocks (dotcoms, whatever is the latest fashion)
4) commodity businesses (mining, oils)
5) operate in sectors prone to contagion (banks)
6) single product/project companies (especially if they operate in a politically unstable country)

When you have a company whose moat that has been breached by new technological developments, such as publishing by the internet or high-street retailers by changing customer habits, local government hostility and the internet, the decline tends to be more gradual (e.g. Marks & Spencer, every newspaper publisher).

If you think you might have too much in one company, a good thought experiment is to see what would happen to your lifestyle if all of your investments in that company became worthless overnight (also if you work there you lose your job with no redundancy pay). If that is going to cause you serious problems then you've got too much in the one basket.

If I hadn't run my huge winners (mostly small cap oils like Soco) I'd still be in work. But when things started to go pear shaped in 2008-09 I chose capital preservation over gains, selling most of my oils and moving the money into stronger moat shares. Nowadays the winners I run are strong moat shares, some of which I first bought over 20 years ago, as my primary strategy is preserving the real value of both capital and income so that I don't have to go back to work!

Whilst it is true that very large stock market gains are unlikely to be made without running winners, for most people, large gains will not be achieved even if they do run their winners. Winners turn into losers and losers into winners. Over time there are far more losers than winners as well, in the sense of losers meaning shares that underperform the market. Something I keep trying to impress on my friend with his mountain of Microsoft shares. There is a very small possibility of Microsoft being worthless overnight, but a very real possibility that over time it will underperform the market and so in the long run he may be better off being diversified even if that does mean taking a large CGT hit now.

Have you ever looked into how things would have turned out for you if you had continued to run your winners instead of diversifying in 2008-9?

[SalvorHardin]

Have you ever looked into how things would have turned out for you if you had continued to run your winners instead of diversifying in 2008-9?

I'd have lost a small fortune but I would still have had just enough of a margin of safety to avoid going back to work. This is because in 2008 in addition to the oils I had a reasonable amount in strong moat companies like Brookfield, Diageo, Unilever, Canadian Pacific and Union Pacific, plus a basket of investment trusts which covered my subsistence living costs (food, utilities, council tax and basic transport).

Very rough figures: if I still held onto my basket of oil shares they would have collectively fallen by 50% to 70% compared to when I sold them. In contrast the portfolio obtained by reinvesting their sale proceeds is up by something like 200% to 250% (plus dividends).

[hiriskpaul]

Have you ever looked into how things would have turned out for you if you had continued to run your winners instead of diversifying in 2008-9?

I'd have lost a small fortune but I would still have had just enough of a margin of safety to avoid going back to work. This is because in 2008 in addition to the oils I had a reasonable amount in strong moat companies like Brookfield, Diageo, Unilever, Canadian Pacific and Union Pacific, plus a basket of investment trusts which covered my subsistence living costs (food, utilities, council tax and basic transport).

Very rough figures: if I still held onto my basket of oil shares they would have collectively fallen by 50% to 70% compared to when I sold them. In contrast the portfolio obtained by reinvesting their sale proceeds is up by something like 200% to 250% (plus dividends).

So running the winners you sold would definitely have been a bad thing to do. That's the trouble with investment mantras and wisdoms. Many may sound clever, but can potentially lead to disastrous outcomes. Some of my biggest gains have come about by buying losers (other people's losers), so the second part of "run your winners..." does not hold much water either!

If it was as simple as run your winners, cut your losers we would all be billionaires.

[tjh290633]

I've just had a quick look at the shares where I have sold out completely, and the price at which I sold:

Centrica plc 64p
Syngenta AG 3141p
O2 90p
Marconi 2.2p
British Airways plc 135p
Intercontinental Hotels Group plc 746p
BG Group plc 690p
Mitchells and Butler plc 596p
Whitbread plc 1370p
Stagecoach Holdings plc 258p
Mapeley Ltd 51.5p
DSG International plc 43p
Trinity Mirror plc 179p
Anglo American plc 2450p
Premier Foods plc 36p
Rentokil Initial plc 126p
Prudential Corp plc 525p
ITV plc 58p
Yule Catto plc 218p
RSA Insurance Group plc 98p
Indivior plc 372p

All the rest of my disposals have been shares taken over. The above were all sold because the yield had fallen or was low in the first place. Centrica was not allowed by my PEP manager at the time and was sold because of no dividend initially.

I haven't given the dates of sale, but Stagecoach down to ITV were all sold in the 2009-10 period in the big shake up.

My guess is that IHG, Whitbread and Prudential may have been worth holding on to.

TJH

[BusyBumbleBee]

Earlier in this topic these comments were made

To put numbers to it one share funds one third roughly of my dividend income,six figures net from that one company.

Have you ever heard of diversification? I suspect that you are overexposed to a few shares.TJH

Have you ever heard of "run your winners''?

I think the "run your winners" mantra is a nonsense.

and we have also had learned comments from both the Founder and the Mayor of Terminus - all of whom are respected members of the Fool.

I like the word "Mantra" - which originally (in Hinduism and Buddhism) was a word or sound repeated to aid concentration in meditation. but which has come to mean "a statement or slogan repeated frequently." and I like Mantras e.g.
"Be fearful when others are greedy", "avoid the herd mentality", "buy and hold", "don't put all your eggs in one basket" etc etc because if you run through them all when stock picking (or selling) they help guide you through some or all (?) the reasons for selling or buying. Most of them contradict each other which gives even more pause for thought.

They're a bit like proverbs really - "he who hesitates is lost" versus "look before you leap" (although personally I prefer the African one "He who tests the depth of a river with both feet is a fool"

What I can see in the posts here is that actually we all look at all these mantras and decide how far to take each one within the limits of our skills and abilitities. I for one find it difficult to pick shares from more than a few (3 or 4) sectors - I simply cannot find the time to analyse much more. I am very happy to have a concentrated portolio (3 to 15 stocks in each) and I am very happy if one share makes up 30% or more of that portfolio.

What I do know though is that we must all try to avoid turning our pet mantras into a dogma where we can see no other way of doing things.

Finally, I do like the mantra which goes something like "look for companies with a moat" - but ask, as Brexit fast approaches for our Island State - are the seas around our island the largest moat of all?

[Pastcaring]

Have you ever heard of diversification? I suspect that you are overexposed to a few shares.TJH

Have you ever heard of "run your winners''? I agree with PastCaring hang on to the good 'uns. I have only had to pay CGT when I have had a 'forced' sale when the other investors in a company have wanted to sell out of a venture capital investments.

I think the "run your winners" mantra is a nonsense. Try telling that to someone who held big positions in say Enron or Lehmans. Running winners is something that is very tempting to do though and I am guilty of doing it myself. I hold a few "winners" now that I would have been better off selling a few years ago and it was largely the unwillingness to take a CGT hit that stopped me.

The most extreme example of running winners I know of is with a friend who has over 90% of his entire net worth in Microsoft shares which produce about 99% of his income. He sells enough each year to utilise his CGT annual allowance. He does admit the level of his exposure is mad, but cannot bring himself to sell more. A combination of unwillingness to pay CGT and giving up on what for him was a winning strategy.[/quotepju

What a load of nonsense,ask somebody that lost money,they must be experts.Ask somebody that made millions,must all be down to luck.

People see what they want to see,hear what they want to hear,and constantly look for validation.Herd instinct and group think B/ shot.

The govt sold that bank off (CBA ) because it was going bust, can' t fool the crowd,they wouldn' t buy any of them.

Then of course LTCM went bust,that proved you should never buy them

Then the Asian currency crisis proved you should never buy them.

Then the tech wreck.

Then Enron.

Then the GFC.

Then Lloyd's went bust. The crowd always agreed that everything is too risky.Pat each other on the back at how clever they are,then repeat that behaviour every day of their lives.

Should we ask the people that were conned by that yank,forget his name ,took billions,movie stars everything .Should we ask them how wonderful it is to have a well diversified portfolio,how safe it is.

Every bullshot mantra will have an opposite one. Carnegie says all eggs in one basket,the crowd say the opposite.Strangely enough the salesman selling diversification has a product to sell,how weird is that.

I' m not interested in what the crowd think,what some other company did,or anything else

There is a chance that that company can go bust,I don' t think they are.Imagine if the share price halved,I sell and walk away,thinking I am too old for this now,I ' ll settle for $1 mill in the bank as acash backup.

The crowd being as insane as they are will laugh,told you so,shouldn' t have done that.

I' ll still be a multi millionaire paying a lot of tax,they still be poor asking how can I pay less tax.

Never ask any VERY rich person how they got there, Sam Walton should never have started Wal Mart.Tesco should never have opened a barrow in the London markets .Ray Kroc should never have thought McDonald's would be good.

All we have to do is name a company that went bust,all we have to do is ask somebody that had shares in a company that went bust.

There are no boundaries to the stupidity of the human race and the delusions they create for themselves

[Pastcaring]

The diversification Mantra.

The chart is AXJOA.Started on 1/1/80 at $1000.
Now stands at around $65000, my nirvana,do nothing at all,let the money do the work.

However,suppose the salesman can get 1000 people to believe in diversification,don' t think for yourself,trust me ,I am an expert.
Suppose over the years a small % age is taken.Shall we say you end up with $50 K the salesman takes $ 15 K total.

The salesmen takes $15 K each from 1000 people,the wonderful sum of $15 million,just to get people to repeat diversification is a must.

I get really annoyed at the financial industry and the crap they sell.

Then they say save up,give the salesman money every month.Exponential growth as they say.

Who could believe the simple words of " Conflict of interest".

As that wonderful book title says

Where are the customers yachts?

[BusyBumbleBee]

I get really annoyed at the financial industry and the crap they sell ... Where are the customers yachts?

A jolly good rant , PastCaring - and I totally agree with the piece underlined above and would add "where are the Financial Advisers without a Beamer or a Merc?"
regards - BBB