When to Top Slice

[dealtn]

If it were me, and my son, I think a long term "learning" decision would be to run the "winner" and not top slice. I think he would learn a lot more as a result, were the price to carry on rising, or fall, than he would by top slicing.

Out of interest in phrasing the question about top-slicing the winner, I haven't seen any discussion on what to do about the "losers". As a contrarian I find that more interesting. Is he considering adding to these, and what would your response be? (And would you similarly be posting seeking advice, and I wonder what that advice would look like!).

Great to hear you are encouraging an interest in investment generally.

[tjh290633]

If it were me, and my son, I think a long term "learning" decision would be to run the "winner" and not top slice. I think he would learn a lot more as a result, were the price to carry on rising, or fall, than he would by top slicing.

Out of interest in phrasing the question about top-slicing the winner, I haven't seen any discussion on what to do about the "losers". As a contrarian I find that more interesting. Is he considering adding to these, and what would your response be? (And would you similarly be posting seeking advice, and I wonder what that advice would look like!).

Great to hear you are encouraging an interest in investment generally.

As I've said before, this year's losers are often next year's winners. Top them up while they are depressed.

TJH

[Itsallaguess]

I do not advocate a focus on high yield or recycling to chase higher yields because I do not think they are good strategies.

Those are my opinions and I am happy to state or imply them.

If someone states some other strategy then the assumption has to be it is because they believe it to be sound.

Well a few posts ago you said that there were posters who were saying that high-yield investing was 'market beating', and now you're saying that they are only suggesting that 'such a strategy is sound', so which one is it?

I asked for an example of an income-investor saying that high-yield investing was 'market beating', and the post you quoted was talking about 2% yields, so where are these posters?

Income-investors finding their strategy 'sound' is a million miles away from them shouting from the rooftops that such an approach is 'market beating', but again, if you can provide evidence of someone actually saying that then I'm all ears...

Cheers,

Itsallaguess

[moorfield]

As I've said before, this year's losers are often next year's winners. Top them up while they are depressed.

Would that include Centrica (CNA) ? (I am considering it...)

[tjh290633]

As I've said before, this year's losers are often next year's winners. Top them up while they are depressed.

Would that include Centrica (CNA) ? (I am considering it...)

It's not and never has been in my portfolio. When it split off from BG it was sold immediately. I have never felt the urge to buy it.

I haven't got my data to hand, but the effect is quite noticeable when you compare successive years.

TJH

[Merkinglue]

Thanks everyone.

Been away for a few days and not logged onto the Lemon. You have added even more fuel for our discussion.

I especially like the path of including what to do with the dogs. Although he hasn't got one at the moment he needs to have some thoughts around stop loss figures and when to pull the eject handle.

In my own portfolio I try to be as hands off as possible but sometimes make choices when I feel things are "out of kilter" RMG was the last one to be culled from my own shares when they reached 65% of purchase price. They've kept dropping so I consider myself lucky there. I still have CNA and IMB both of which are a long way down on purchase price. But I'm not here to display my hair shirt, just looking for pointers for the lad.

Happy Christmas to you all and thanks for the really valuable input.

[Bouleversee]

I have just been wrapping one of my presents for one of my grandchildren: a newly published book by Lord John Lee, the first ISA millionaire, called Yummi Yoghurt - a first taste of stock market investment - written to educate teenagers in the basic principles of stock market investment. I thought I'd have a quick shufti first and noted that the last of his 12 recommendations "to help you invest profitably and successfully and to avoid losses" said the following:
"Retain profitable shareholdings - hopefully to grow even more. Avoid the temptation to realise a quick profit. If you are invested in a good growing company which you like, which regularly increases its profits and dividends, stay aboard. The biggest mistake private investors make is too frequently chopping and changing - moving from share to share - stay put for bigger long-term profits."

There are exceptions to every rule, of course, but barring one or two instances where the price has shot up soon after purchase and I have sold half, this advice is what I have largely followed and it has paid off. Apart from anything else, I don't want the extra work. The mistake I have made, since being introduced to HYP, is to go for a high yield and then not sell when it drops but to top up, something I don't intend to do again. From my experience, it makes more sense to stick with the winners and sell the losers unless you know there is a good, temporary reason for the drop. I don't worry about being overweight when that is due to outstanding success but with the number of holdings I have, it doesn't matter anyway. One brilliant one compensates for several duds.

Lord Lee's other recommendations are also very sensible but not relevant to this thread.

[77ss]

......
"Retain profitable shareholdings - hopefully to grow even more. Avoid the temptation to realise a quick profit. If you are invested in a good growing company which you like, which regularly increases its profits and dividends, stay aboard. The biggest mistake private investors make is too frequently chopping and changing - moving from share to share - stay put for bigger long-term profits."

.....

By and large, I would agree with that, but it sounds to me as though he is talking about selling 'lock stock and barrel' rather than top-slicing.

Typically, when I top-slice, I do so by amounts of between 8 and 15% - smaller fractions than in tjh's methodology, but it suits me. Clearly charges would render this non-viable for small holdings, but I am 'fully built'.

From the 'run your winners' adage, I am clearly continuing to run the large bulk of any winners.

From the 'nobody ever went broke taking a profit' attitude, I'm realising some capital gains.

The key point, make or break, is where do you put the proceeds of any top-slice. If you just need some spending money then that's not an issue, but if you are reinvesting the top-slice then in my view, you need to have some researched destinations for the proceeds - whether topping up an existing holding or buying a new one, and you can't expect every switch to be a winner - any more than any other purchase.

One point about 'winners' - you never know when a 'winner' is going to hit the buffers. BP was doing well for me until Macondo (and 9.5 years later the share price is exactly where it was when I bailed out). Provident Financial was doing well until a disastrous managerial decision. AstraZeneca is doing very well, but it only takes one reversal to change that - see the 10% drop that occurred after the negative Mystic trial results in June 2017 - soon recovered, but what if it had been something more serious? Like an unexpected toxicity or side-effect problem?

Consider it the converse of tjh's point about today's losers turning into tomorrow's winners.

I regard modest top-slicing as a form of insurance against such events.

[tjh290633]

My suggestion is to look at GEC when it became Marconi. Had I not top sliced on the way up I would have lost a lot of money. As it was, I had recovered my original cost well before the catastrophic fall began. I made the mistake of buying back in to some extent before they stopped paying dividends, but still ended up with a marginal profit instead of a thumping big loss.

TJH

[Bubblesofearth]

I regard modest top-slicing as a form of insurance against such events.

Adequate diversification is a much better insurance IMO. If you start with 50 shares then any individual share has to do a lot to become meaningfully overweight. Even a 5-fold increase relative to the rest of the portfolio would only have it around the same kind of weighting that Shell has in the FTSE and that never seems to worry those buying trackers.

BoE

[stressor]

Here is a simple mathematical model of how to top slice, it's a working model, if you think it could be improved let me know. Asusmptions: you want too sell completely when a share is 50% up in value (you believe that is the peak). You want to sell in 10 slices. Now lets assume the movement of a share is a probability distribution something like this....

movement frequency of move
5.00% 25.97
10.00% 21.04
15.00% 16.62
20.00% 12.73
25.00% 9.35
30.00% 6.49
35.00% 4.16
40.00% 2.34
45.00% 1.04
50.00% 0.26

Now lets look at the modelled likely ££ return at each 5% slice (simply increase in value x chance of increase)

movement FRQ modelled ££ rtn
5.00% 25.97 129.85
10.00% 21.04 210.4
15.00% 16.62 249.3
20.00% 12.73 254.6
25.00% 9.35 233.75
30.00% 6.49 194.7
35.00% 4.16 145.6
40.00% 2.34 93.6
45.00% 1.04 46.8
50.00% 0.26 13

So if this logic is correct, you should sell according to the chance of ££ increase which in percentage terms is the following

share movement then sell>
5.00% sell 8.3%
10.00% sell 13.4%
15.00% sell 15.9%
20.00% sell 16.2%
25.00% sell 14.9%
30.00% sell 12.4%
35.00% sell 9.3%
40.00% sell 6%
45.00% sell 3%
50.00% sell 0.8%

Of course the model depends on all the above assumptions, but I think you get the idea. BTW if you didnt want to do anything at 5% because its too common, and wanted only 5 selling slices then it would look like this

10% up >> sell 27.5%
20% up >> sell 33%
30% up >> sell 25%
40% up >> sell 12%
50% up >> sell 2%

Its is pretty easy to re-map the model to any assumption. merry christmas!

[Bubblesofearth]

Here is a simple mathematical model of how to top slice, it's a working model, if you think it could be improved let me know. Asusmptions: you want too sell completely when a share is 50% up in value (you believe that is the peak). You want to sell in 10 slices. Now lets assume the movement of a share is a probability distribution something like this....

movement frequency of move
5.00% 25.97
10.00% 21.04
15.00% 16.62
20.00% 12.73
25.00% 9.35
30.00% 6.49
35.00% 4.16
40.00% 2.34
45.00% 1.04
50.00% 0.26

Now lets look at the modelled likely ££ return at each 5% slice (simply increase in value x chance of increase)

movement FRQ modelled ££ rtn
5.00% 25.97 129.85
10.00% 21.04 210.4
15.00% 16.62 249.3
20.00% 12.73 254.6
25.00% 9.35 233.75
30.00% 6.49 194.7
35.00% 4.16 145.6
40.00% 2.34 93.6
45.00% 1.04 46.8
50.00% 0.26 13

So if this logic is correct, you should sell according to the chance of ££ increase which in percentage terms is the following

share movement then sell>
5.00% sell 8.3%
10.00% sell 13.4%
15.00% sell 15.9%
20.00% sell 16.2%
25.00% sell 14.9%
30.00% sell 12.4%
35.00% sell 9.3%
40.00% sell 6%
45.00% sell 3%
50.00% sell 0.8%

Of course the model depends on all the above assumptions, but I think you get the idea. BTW if you didnt want to do anything at 5% because its too common, and wanted only 5 selling slices then it would look like this

10% up >> sell 27.5%
20% up >> sell 33%
30% up >> sell 25%
40% up >> sell 12%
50% up >> sell 2%

Its is pretty easy to re-map the model to any assumption. merry christmas!

Brokers would love this model!

BoE

[Dod101]

I regard modest top-slicing as a form of insurance against such events.

Adequate diversification is a much better insurance IMO. If you start with 50 shares then any individual share has to do a lot to become meaningfully overweight. Even a 5-fold increase relative to the rest of the portfolio would only have it around the same kind of weighting that Shell has in the FTSE and that never seems to worry those buying trackers.

BoE

Holding 50 shares is not diversification but diworsification. It is a fairly hamfisted way of going about avoiding the problem of one share dominating a portfolio.

Dod

[Dod101]

What on earth is stressor on about? Investment strategies ought to be simple and straightforward. I assume it is keeping him happy but for the benefit of any newbies reading this, I have been investing for about the past 25 years and have never felt the need to construct tables like stressor's to be reasonably successful and I doubt that many people have.

Remember keep it simple.

Dod

[scrumpyjack]

I'm with Dod01 on this.

This argument seems to go on and on (or is round and round!).

I have never felt the urge to top slice (in over 50 years of investing) and in retrospect I’m very glad I didn’t. I have had a number of shares that have multiplied 5 to 10 times, or more, and selling out when I was 50% up would have meant missing most of the gain.

If you think a company has a good long term future, keep it. If it doesn’t, sell it.

Have a bedrock of ITs and Trackers so you can sleep at night, but forget the mathematical formulae

[Bubblesofearth]

Holding 50 shares is not diversification but diworsification. It is a fairly hamfisted way of going about avoiding the problem of one share dominating a portfolio.

Dod

I start from the following assumptions;

1. I do not know more than the market when it comes to share valuations.
2. Diversification is the only 'free lunch' that the market offers investors.
3. Every time you trade you pay at least 1% costs.

These take me to a level of diversification that leads to a minimal need to trade (top-slice, rebalance, whatever) over time.

The word diworsification carries the inherent assumption that the investor is able to either select winners or avoid losers. Otherwise how can increased diversification be bad?

The only other assumption I have, more controversial than the three above, is that equal weight on purchase is optimal. Hence no trackers for me.

I should add that this strategy has worked so far for me + spouse. The best performing shares have still to go above 10% of the total portfolio.

BoE

[stressor]

What on earth is stressor on about? Investment strategies ought to be simple and straightforward.

haha don't worry, its only a draft model of *how you might optimally top slice* when you don't know the share peak for sure.

and I forgot one thing, the frequency of the slices would come at additional broker costs....so the number of slices would be small for most trading position (eg 3 slices).

[Dod101]

Holding 50 shares is not diversification but diworsification. It is a fairly hamfisted way of going about avoiding the problem of one share dominating a portfolio.

Dod

I start from the following assumptions;

1. I do not know more than the market when it comes to share valuations.
2. Diversification is the only 'free lunch' that the market offers investors.
3. Every time you trade you pay at least 1% costs.

These take me to a level of diversification that leads to a minimal need to trade (top-slice, rebalance, whatever) over time.

The word diworsification carries the inherent assumption that the investor is able to either select winners or avoid losers. Otherwise how can increased diversification be bad?

The only other assumption I have, more controversial than the three above, is that equal weight on purchase is optimal. Hence no trackers for me.

I should add that this strategy has worked so far for me + spouse. The best performing shares have still to go above 10% of the total portfolio.

BoE

Every time you trade you pay at least 1% costs. Really? Apart from the fact that many platforms now give us several free trades per quarter, you must be dealing in very small numbers. I am sure I pay nothing like that if I sell something and buy something else.

Over-diversification (I, like Peter Lynch, call that diworsification) provides a great possibility of picking up one or two dud shares, the more shares you choose the more likely that is. That is my experience anyway so I restrict myself to around 29/30 shares at any one time. So far I have in recent times avoided losers, although it depends what you mean by a loser. Obviously, all shares fluctuate in value down as well as up but that does not make them a loser.

Dod

[tjh290633]

In viewtopic.php?p=273139#p273139 I undertook to show my record of successive annual winners and losers from my portfolio. Here it is:

.      2014              2015               2016      .      2017       .       2018             2019
Epic     Change    Epic    Change    Epic     Change    Epic   Change    Epic    Change     Epic   Change 
UU.       36.41%   TW.      47.39%   S32      207.62%   INDV    37.81%   PSON      27.50%   SGRO    51.31%
AZN       27.44%   REX      33.21%   BLT       71.91%   TW.     34.46%   AZN       14.68%   TW.     41.36%
INDV @    24.50%   IMT      26.46%   PFL *     67.45%   DGE     29.15%   GSK       12.76%   MARS    36.95%
TW.       23.59%   INDV     25.70%   INDV      57.72%   IMI     28.17%   BHP        8.48%   SSE     35.69%
BLND      23.53%   ADM      25.49%   RDSB      52.56%   SGRO    28.14%   CPG        3.13%   LGEN    33.77%
IMT       21.30%   SMDS     23.20%   BP.       43.95%   SMDS    26.81%   DGE        2.57%   TSCO    33.30%
SSE       18.39%   RB.      20.56%   RIO @     42.12%   S32     25.54%   ADM        2.25%   AZN     31.35%
NG.       16.51%   BT.A     17.48%   TSCO      38.36%   ULVR    25.30%   SGRO       0.27%   SMDS    31.21%
CPG       13.75%   SGRO     15.96%   CPG       27.74%   RIO     24.81%   ULVR      -0.41%   BATS    30.86%
SGRO      10.87%   MARS     15.95%   BATS      22.55%   VOD     17.59%   BP.       -5.12%   UU.     29.15%
MKS       10.68%   ULVR     11.36%   IMI       20.72%   BLT     16.53%   RIO       -5.38%   IMI     27.75%
RB.        8.70%   WMH       9.24%   BA.       18.39%   AZN     15.40%   TATE      -6.12%   BA.     26.05%
BA.        8.51%   BATS      7.74%   TATE      18.11%   WMH     10.96%   RDSB      -6.72%   NG.     25.52%
BATS       8.09%   CPG       6.71%   LGEN @    15.33%   LGEN    10.38%   INDV*     -8.87%   LLOY    22.39%
AV.        7.74%   AV.       6.50%   GSK       13.77%   BLND     9.85%   TSCO      -9.15%   GSK     21.89%
RSA *      6.74%   BA.       5.85%   DGE       13.65%   ADM      9.58%   S32       -9.25%   RIO     21.58%
ULVR       5.88%   UU.       2.13%   ULVR      12.51%   BATS     8.58%   UU.      -11.25%   WMH     19.39%
BT.A       5.82%   NG.       2.11%   PSON      11.21%   LLOY     8.41%   BT.A     -12.37%   TATE    16.45%
MARS       0.00%   AZN       1.34%   ADM       10.13%   CPG      6.60%   NG.      -12.67%   BLND    16.28%
RDSB      -2.06%   BLND      1.16%   RB.        9.63%   RDSB     6.56%   RB.      -13.09%   CPG     16.27%
SMDS      -3.01%   DGE       0.43%   SGRO       6.68%   AV.      4.13%   LGEN     -15.48%   DGE     15.21%
LLOY      -3.88%   GSK      -0.22%   KGF        6.31%   BP.      2.57%   MARS     -16.40%   AV.     12.54%
VOD       -6.05%   TATE     -0.66%   REX *      4.90%   TSCO     1.16%   SSE      -18.07%   ADM     12.36%
DGE       -7.58%   VOD      -0.74%   SMDS       2.87%   RB.      0.48%   BA.      -19.86%   BHP      8.46%
WMH       -9.80%   KGF      -3.23%   SSE        1.64%   TATE    -0.64%   MKS      -21.47%   ULVR     6.84%
PSON     -11.26%   LLOY     -3.63%   NG.        1.50%   BA.     -3.13%   BLND     -22.89%   KGF      6.17%
KGF      -11.49%   MKS      -5.51%   IMB       -1.23%   KGF     -3.60%   LLOY     -23.86%   RB.      2.83%
ADM      -12.39%   SSE      -5.80%   UU.       -3.69%   UU.     -7.94%   IMB      -24.92%   VOD     -1.64%
REX      -14.46%   BP.     -13.87%   AZN       -3.88%   NG.     -8.04%   AV.      -25.86%   BP.     -1.66%
GSK      -14.61%   TSCO    -20.90%   AV.       -5.74%   MKS    -10.06%   IMI      -29.18%   RDSB    -2.78%
BP.      -15.79%   RDSB    -30.90%   VOD       -9.57%   PSON   -10.08%   TW.      -33.99%   MKS    -12.54%
IMI      -17.18%   IMI     -31.79%   LLOY     -14.08%   IMB    -10.63%   VOD      -34.94%   BT.A   -17.68%
PFL      -20.76%   PSON    -38.15%   MARS     -18.32%   SSE    -15.00%   KGF      -38.55%   S32    -21.13%
TATE     -25.46%   PFL     -44.32%   BLND     -19.91%   GSK    -15.33%   SMDS     -42.16%   IMB    -21.72%
BLT      -25.71%   BLT     -45.26%   CLLN @   -20.03%   MARS   -17.28%   BATS     -50.18%   PSON   -29.88%
TSCO     -43.47%   S32 @   -49.52%   BT.A     -22.22%   BT.A   -25.95%   WMH      -51.86%                 
                                     MKS      -22.63%   CLLN   -92.69%   CLLN*   -100.00%                 
                                     TW.      -24.42%                                                     
                                     WMH      -26.72%

You can amuse yourselves comparing winners and losers in successive years. Shares marked* were disposed of in that year. @indicates a new holding in that year.

TJH

[Bubblesofearth]

Every time you trade you pay at least 1% costs. Really? Apart from the fact that many platforms now give us several free trades per quarter, you must be dealing in very small numbers. I am sure I pay nothing like that if I sell something and buy something else.

Over-diversification (I, like Peter Lynch, call that diworsification) provides a great possibility of picking up one or two dud shares, the more shares you choose the more likely that is. That is my experience anyway so I restrict myself to around 29/30 shares at any one time. So far I have in recent times avoided losers, although it depends what you mean by a loser. Obviously, all shares fluctuate in value down as well as up but that does not make them a loser.

Dod

Take a £5000 trade which I think is fairly typical for many investors, certainly I would be in this camp if I traded much. My costs are;

£25 stamp
£20 broker costs
£5 buy/sell spread

That's a total cost of £50, or 1%

It will be materially higher if trading less liquid stocks as the buy/sell spread will likely be higher.

OK, if you have free trades or are dealing in much larger amounts (even less likely if top-slicing) this comes down but I believe 1% is typical for most. Also I'm not sure 'free trades' are ever really free. Everything that brokers offer will benefit them in some way even if it is simply to encourage customer loyalty. It may be that you pay in other ways to remain with that broker? Tesco offer club card loyalty but still charge more for my shopping than Aldi!

As regards your other comment the % chance of picking at least one dud goes up with level of diversification but so does the chance of picking a big winner. Big winners have been shown to drive the bulk of market, and hence portfolio, gains and it is therefore more important to capture these than to avoid duds. Like you, many people focus on avoiding failures but this is IMO the wrong way round.

BoE