Tuesday, 19 February 2013

Preferences and Prejudices - a personal trading strategy....

If what follows could ever be described as a 'strategy'....

Financial Advice ?
Note that I'm not a financial adviser and nor would I recommend that you shell out your hard-earned readies in seeking so-called 'professional' investment advice.  Do your own research.

(There's a proviso to this, however, in that I wouldn't be averse to asking my accountant for information on how a particular financial instrument would be treated for tax purposes.   Trading accounts, ISAs and SIPPs etc are simple enough vehicles for most people to readily understand their tax treatment, but there are many things out there that aren't – the UK tax code runs to several thousand pages, and like most tax 'rules' they are not designed to be definitive but are deliberately left open to interpretation....generally though, if you can't fully understand an 'opportunity' yourself, without taking external advice, then it may be more prudent not to pursue it at all.)

Having established and understood what are the particular tax advantages or otherwise of the investment type or wrapper in which they're held, there's absolutely no-one out there who is qualified to advise you in which particular industry sectors, shares, funds, bonds, trackers, commodities etc you should invest.

If such advice was any good then why would anyone need to provide it for a fee –  why aren't they already rich enough themselves not to have to bother working any more ?   If they really knew something worthwhile then why would they share it with you  ?  All this and more has been said many times before about financial advice, but in this case repetition doesn't make it any less true.  

Just read up all you can on any particular investment subject that interests you, decide which bits appeal to your own way of thinking and which you'll choose to ignore, and then go ahead and do your own thing. 

You should also regard anything you take from this post as being worth exactly what you paid for it, i.e. nothing....  it's just my own preferences and prejudices.

The Financial Press
It is the raison d'etre of journalists to write something to fill otherwise empty pages, and billions of words must therefore be produced on a very regular basis regardless of whether or not the authors have anything useful or original to say.  This also applies to some of the bloggers out there, who can derive a sizeable income from producing regular output in an attempt to drive up the advertising count from the viewings.  I should be so lucky... ;-)

When was the last time you saw an empty column in newsprint or on the web with the header '....er, sorry, nothing new or original to say today...'.  It just doesn't happen.  Therefore there's a huge information overload, with some new but mainly recycled ideas, plus reactions and over-reactions to current events, and therefore it's easy to feel overwhelmed and bemused from the reams of contradictory advice and opinions out there.

The written word also has a very curious implied authority about it.  People generally wouldn't heed any financial advice given in slurred tones from the drunken dead-beat at the end of the bar, but it's a different matter when he types it out later and publishes it....

All I'm saying is, (a) read it, (b) question the author's motives in talking something up - or down - and then (c) take it, leave it or adapt it depending on your own preferences and prejudices.

Remember that financial institutions, journalists and bloggers have preferences and prejudices of their own, which may well conflict with yours.

There are no rules....
Despite the huge diversity in their approach and political outlooks, it's surprising how many business & personal finance publications, websites, blogs etc all regurgitate exactly the same things, as though the authors have been pre-programmed at birth.  Here's just a few of them :-

  • You should always be invested in the markets
  • Equity investing is for the long term
  • Don't try to time the markets
  • Run with your winners
  • Don't be afraid to cut your losses
There are many, many other 'rules' of this ilk, some of which even totally contradict each other, but let me suggest to you just one....

there are no rules... nothing is sacred

I wouldn't advocate taking stupid risks or over-committing yourself, but otherwise simply do what feels right for you.

One oft-repeated recommendation seems to be that you need to be invested all the time, and at any cost.  There's blogs out there detailing ways to switch holdings or even trading accounts whilst minimising the time they're out of the market.   Their argument is that, historically, very significant market gains have been made on a few single days, and so therefore you need to always be in the game to avoid losing out.  However, very significant losses have been made on a few single days too, and you're just as likely to be out of the market at the right moment as the wrong one....

On a personal level, I have two trading accounts.  The SIPP, in which I bought a broad basket of equities all around the same time and have basically left them untouched, and the ISA which is much more actively traded.  (I also used to have a regular trading account but over the last year I gradually ran it down to zero holdings, withdrew the cash as I went and then closed it completely.)

Over the past three years, the value of the SIPP severely dipped in 2011, rose steadily again in 2012 and at the time of writing has just about recovered to its 2010 level. 

On the other hand, my current ISA value is 30% higher than the original investment sum in the same timescale.  (In real terms, of course, inflation has eroded the true value of the sum by 10% or so over the period, so regarding it as a 20% real return is a more realisitic assessment.)

Why the difference ?  Because I actively seek to time the market with my ISA picks.   Unlike the SIPP, I'm not looking for prolonged high yields or the prospect of long-term growth, I'm simply opportunistic, although I certainly don't speculate in IPOs of dodgy shell companies or buy penny shares - most of the stocks I buy are blue-chip within an industry sector I understand reasonably well and with valuable physical assets and hopefully strong future cashflows.  I strictly avoid the likes of social media companies and internet content providers etc which require no fixed assets, have very low barriers to entry by new competitors and rely solely on subscriptions or advertising for their revenues.   Just my own personal preferences and prejudices again....

Just the simple act of writing this post had led me to seriously consider a more agressive approach to my SIPP investments, or at least half of them.  I'm now thinking of leaving half my SIPP holdings in higher-yield defensive stocks and ETF trackers, and then more actively trading the other half.

In the ISA, I tend to buy quite strongly on what I regard as severe market dips and then wait for a recovery point at which I can bail out again at a profit.   If the market continues to dip or treads water for a long time, then I might have to wait many months for such a recovery.  I also don't particularly like selling at a loss and, let's face it, no-one should like it.  Therefore unless I've picked an absolute dog (...it happens...) which is way underperforming its peers or the market, then I'll always give it some time to bounce back unless there's something else I think I could buy with the sale proceeds which would be likely to recover any losses more quickly.

I don't day trade, because I've neither the time nor the inclination to sit in front of screens of market tickers all day, but I'm not knocking those who can do it successfully, and there have been occasions when I've been in-and-out of the market with a profit in the space of a week.  It's also sometimes been up to nine months between trades, depending on the market conditions. 

I don't track charts, or analyse any particular stock movement patterns in detail, other than regularly looking at what the FTSE100, FTSE350 and my stocks-to-follow are doing.  The lower half of the FTSE350 index is generally more representative of what's actually going on within the UK – the FTSE100 contains many stocks that derive most of their revenues from trading internationally.

It's general market conditions that I regard as important - if your chosen stock pick is lagging seriously behind its peers then it's an indication that the company may be troubled, whereas if all the prices in that particular sector are similarly depressed then it's the market which is not performing.

I'm not looking for double-baggers here - when either the stock value itself or the general indices have risen to a level at which I start to feel uncomfortable, then I'll sell immediately even though it might only net a few hundred pounds each time, or I'll set a fairly tight trailing stop order and let it run a little. 

If the stock continues its upward run unbroken then I'll keep raising the stop order behind it.  If there's a temporary blip before it should rise further again, and I get stopped-out long before the eventual peak, well that's just tough shit - I'm still in profit and I'm not greedy.

As a demonstration, there is one particular FTSE100 company in which I've bought and sold shares twelve times in the past four years.  Those trades in just this one company, after all dealing costs and stamp duty etc, have netted me around £6,000 in gains in that time.  (I also have a holding of this exact same share within my SIPP, and it's currently trading below the price I paid for it more than three years ago...)
I'm also not afraid to have a lot of cash in the ISA trading account at any time, even though it's not earning anything at all.  In fact at present, after a month of profit taking in January's rising market, cash now represents around two-thirds of my total ISA account value and I'm in no particular hurry to get back into the market again at current pricing levels.   I'm still occasionally looking at the market movements and the prices of the stocks I've recently sold, to see when it might be worthwhile dipping my toe in the water again.

On the subject of taking small profits every time, in the dim and distant past of the 1980s there was a long series of IPOs for utility companies etc which were privatised by the government.  In those days, before Crest etc, you had to submit written application forms for everything, send cheques as payment and then wait for weeks until you received a paper share certificate before you could sell them on.  These flotations were also generally hugely over-subscribed, and so you tended to receive many fewer shares than for which you applied, but this meant that market demand was usually high after trading commenced.    Some of my colleagues at that time couldn't understand why I bothered with all these new issues, given the hassle involved, when the end result was '..just £100..' profit, in their words.   I used to counter by asking them how many hours they needed to work each month in order to have £100 after tax to keep entirely to themselves, and which was not already earmarked to be spent on the mortgage, bills, kids etc....


  1. Some great info there, thanks! Trading isn't something I'd consider doing right now, although it does interest me and I like to read about what other people are doing. I'd be interested to know which FTSE100 company enabled you to make £6k through trading. Of course, I understand if you don't wish to name them, in case people think you are providing advice to buy/sell!

  2. Hi. Thanks for stopping by again. No problem in naming this stock, now it doesn't really exist any more - it was Xstrata (XTA), now subsumed by Glencore into 'Glenstrata' or Glencore Xstrata as its formally known. A big dilution in value for Xstrata IMHO, who lost a lot of key people from the productive XTA side, including friends of mine who've jumped ship into other producers.

    Glencore was basically a metals trader, as opposed to Xstrata which was a metals producer.

    However, FWIW, I still have a small holding in the new combined company...

  3. Thanks for the reply. Aha, I've heard of the old company before but never knew what they did - good job on making the £6k!

    I just re-read your post and had a chuckle at the comment "oft-repeated recommendation seems to be that you need to be invested all the time, and at any cost." I've recently had some cash sitting in my share ISA and I was getting a bit twitchy that I couldn't buy anything with it. I guess as I don't follow the markets closely nor will I try to time it, I'll just buy something when there's enough cash to buy. Thanks for confirming that there are no rules! :-)

    1. Hi. Thanks again. Regarding the '...confirmation that there are no rules...', I'm not a financial adviser..... you have to figure it out for yourself !!!