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Stock Allocation - equal split?
Aminatidi
Posted: 16 May 2018 16:18:06(UTC)
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I keep reading I should be my own fund manager so I've decided to give it a go with a small chunk of money.

Some are UK some are US so my "cunning" plan was simply to do an equal split to start with as the intention is to buy and hold rather than try to be the next Tony P.

I know that there's no "right" or "wrong" way of doing this but I am interested in knowing if this is what other people do/did when starting out and having no reason to favour one stock in their selection over the other so far as weighting?
King Lodos
Posted: 16 May 2018 17:22:34(UTC)
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I think it depends .. A lot of that advice comes from an age when you paid a huge chunk to fund managers.

These days, there are great funds with 0.5% charges, and index funds that cost virtually nothing (and would save you money vs paying trading costs).

So then the question is: can you do a better job than fund managers, and beat the market, with your own stock picks? .. Well not many can .. And unless they're posting their trades and holdings regularly, you should be highly skeptical of those who claim they can (and regard as lucky those who do, until the track record spans at least a whole business cycle).


The best reason to do it is to learn, and perhaps see if you have got a great aptitude for it.

I think there is benefit in seeing investments as part-ownings in real businesses, rather than just a chart connected to a fund you don't really understand .. But if you take Warren Buffett's approach: 99.9% of what you do will be reading .. Books on investing, on business, on accounting, and reading company accounts.

I think getting into investing with the idea you'll do a bit of buying and selling, and bet on a few firms, is just gloried horse racing – and not likely to benefit anyone, financially or otherwise
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Aminatidi on 16/05/2018(UTC), George C on 17/05/2018(UTC), mcminvest on 18/05/2018(UTC)
Aminatidi
Posted: 16 May 2018 17:39:31(UTC)
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Thank you and yes that makes sense to me, there's a trio of funds that is intended to be core because with the volume of money going into them over time I have more confidence in the managers of those funds than I do in myself.

I'm not planning on re-inventing the wheel, most ideas are from the "one company to buy forever" thread and feature in the likes of Lindsell Train and Fundsmith so my intention is to see how I go with a small sum.

Point fully taken about horse racing, that isn't my intention at all.
King Lodos
Posted: 16 May 2018 17:55:19(UTC)
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Well if you want some reading – I'd say the most influential books for me so far have been:

– New Buffettology – for hammering home how to look at stocks as businesses, and how to value a company.

– Invest Like a Guru (Charlie Tian) – new book, with some of the latest analytics and evidence-based approaches to stock-picking. (a wealth of information only possible with the amount of data and analytics tools we've got now)

– The Art of Execution – largely overlooked aspect of investing: how to buy and sell, and not get into a mess.


Terry Smith has employees read What Works on Wall Street, which has a lot of quantitative data, and is a useful read for hammering home how data should inform decisions .. It's a classic, but I think Invest Like a Guru goes further and is a better read .. And then Warren Buffett's letters to shareholders are essential reading for a complete view of investing .. And I really like the Market Wizards series, although it's more aimed at traders – a great way to learn more about how markets work
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Aminatidi on 16/05/2018(UTC), Robin Stone on 17/05/2018(UTC), Tim D on 18/05/2018(UTC)
Aminatidi
Posted: 16 May 2018 18:06:27(UTC)
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I have Buffettology (the original one) waiting to be read and I'm part way through Keith Ashworth-Lord's book.

I've been reading Warren Buffett (and Charlie Munger's) annual letters and watching the last couple of Berkshire Hathaway AGMs - I thought the Fundsmith AGM videos were lengthy but these things are literally 5 hours long and that's the edited versions.

If I'm honest I know bugger all on how to value a company at this point but I do think they hammer home the basic principle around simply understand what the business does and buying a piece of the business rather than trying to buy share performance.

The stocks I'm considering really aren't exciting, but that's sort of the point.
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King Lodos on 16/05/2018(UTC)
King Lodos
Posted: 16 May 2018 18:52:04(UTC)
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You can value a company in terms of expected earnings.

Really simple example: If I start a business that does web consulting, and generates £10,000 a year net income .. If someone wanted to buy this business, it's fairly standard to value it based on 15 years income .. So assuming no growth, the value of the business might be 15 x £10,000 = £150,000.

That means it has a P/E ratio of 15 .. Price / Earnings = 15 .. The investment yields 1 / PE = earnings yield = 6.667%.


If I could buy a bond in a comparable business that yielded 7%, you're probably better buying the bond (unless there's another reason to buy the stock: growth, brand value, etc. which justifies paying a higher price).

From this basic structure you can build more sophisticated ways to look at value .. Buffett's approach is pretty simple; but factors in the more intangible aspects of a business – like whether its earnings can be competed away; whether it has a 'moat', that makes it difficult to compete with .. So it takes a lot more actual knowledge and intuition when it comes to knowing business – which is why you should stick to maybe two sectors you have firsthand knowledge of.

I think a kid who knows videogames, with that basic grounding in valuing a business, could do a lot better than a professional fund manager if they stuck to the companies they're interested in
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Aminatidi on 16/05/2018(UTC), Chris Howland on 17/05/2018(UTC)
Aminatidi
Posted: 17 May 2018 07:46:06(UTC)
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Any views on timing?

In so much as I often hear Terry Smith and Nick Train say they don't try and time the market but I also hear/read them say there are companies they'd like to buy but don't feel the price is right.

I suspect I'm conflating short term share pricing and long term value?
Sara G
Posted: 17 May 2018 08:15:28(UTC)
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Aminatidi, along with the excellent reading suggestions from KL I would also recommend buying a basic guide on how to read a balance sheet - there are plenty on Amazon.

I also like John Kingham's articles and book 'The Defensive Value Investor'.
5 users thanked Sara G for this post.
Mr Helpful on 17/05/2018(UTC), King Lodos on 17/05/2018(UTC), Aminatidi on 17/05/2018(UTC), mcminvest on 18/05/2018(UTC), Tim D on 18/05/2018(UTC)
Chris Ould
Posted: 17 May 2018 09:40:18(UTC)
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Aminatidi, cannot really add to the excellent advice given hear by KL or Sara G....but what i can offer is some feedback on what decided to do about 18 months ago.

Having digested the advice of TP and KL, followed an example set by Micawber and allocated a small (around 15-20%) proportion of my portfolio to individual shares, generally Small-Cap / AIM. Gradually building it up, I currently hold:
SXX
DGOC
TAM
AFX
BANG
RWS (interesting at the moment, having dropped 25% Buffettology have been adding)

Obviously, these are not for widows & orphans...but you witness the effect of profit warnings, placings, changes in market sentiment...and having previously stuck to IT's or UT's, it's proved a valuable learning experience.
3 users thanked Chris Ould for this post.
King Lodos on 17/05/2018(UTC), Aminatidi on 17/05/2018(UTC), Sara G on 17/05/2018(UTC)
Aminatidi
Posted: 17 May 2018 12:13:57(UTC)
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Thanks some good stuff there.

Last night I put about 10% of my total pot into a non-ISA GIA and purchased some direct US stocks, intention is to add some specific UK ones soon.

With the US ones it's interesting how my gain/loss fluctuates simply off currency variations.
King Lodos
Posted: 17 May 2018 12:35:49(UTC)
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Aminatidi;62426 wrote:
Any views on timing?

In so much as I often hear Terry Smith and Nick Train say they don't try and time the market but I also hear/read them say there are companies they'd like to buy but don't feel the price is right.

I suspect I'm conflating short term share pricing and long term value?


Well I think you want a watchlist of companies you would invest in at the right price .. I think Fundsmith track 50 or 100? .. As a lone investor, I only track about 20.

Have them in a spreadsheet, and build a valuation model .. The simplest would be earnings or cash flow yield .. So maybe every month enter Price-to-Free-Cash-Flow into the spreadsheet for each company, use 1 divided by that to calculate the Yield, and then by each company have a future return estimate – e.g. 10.5%.

Then, as the price of the stock goes lower, the return estimate gets higher .. So across my watchlist, maybe there are one or two stocks on slightly higher estimated returns than the rest; maybe some I'm holding have risen and now predict lower returns, so there could be an opportunity to sell a bit of an expensive stock and add a cheaper one .. That's all price really informs .. Your ability as an investor is basically how well you can value a company – along with the criteria you use to decide whether a company is worth investing in in the first place
hooligan
Posted: 17 May 2018 17:35:10(UTC)
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there's a lot of personal information missing here.
like, how old are you? what are your other assets? what are you trying to achieve, over what time frame? how much time do you have to work on your portfolio and lastly (but not leastly (sic) )how much risk can you stand and is it just the volatility of the overall portfolio OR is it relative to a benchmark (e.g. a regret index that you would hate not at least matching)? might you need a cash draw for an emergency? lastly, how will you measure success or failure?

To quote from Lewis Carroll:
“Alice: Would you tell me, please, which way I ought to go from here?
The Cheshire Cat: That depends a good deal on where you want to get to.
Alice: I don't much care where.
The Cheshire Cat: Then it doesn't much matter which way you go.
Alice: ...So long as I get somewhere.
The Cheshire Cat: Oh, you're sure to do that, if only you walk long enough.”

Since you are looking at US/UK stocks, I would set yourself a target of 2-4% above the average return from the S&P500 Total Return (in £) and the FTSE All Share Total Return indices in the next three years. As far as timing is concerned, you are as subject to the whims of fortune as a horse race. Remember the S&P500 was 666 in March 2009 (with sterling pretty much where it is now) and is now 2,723, i.e. it has tripled in a little under ten years for a compumd rate of return of 15%. In my view that is unlikely to be repeated, and, in fact, over the next three years, the best you can hope for is zero from the market.
Given that, your objective ought to be just to keep as much of your capital intact as possible.
As far as diversification is concerned, it is statistically impossible to reduce risk in a portfolio once you get beyond around 15-20 securities.
As far as stock picking is concerned, I use a PEG ratio, with a minimum earnings growth for the last 3 years and projected for the next three years of 10%. PEG = the ratio of the PE to the earnings growth rate. i factor in a few other things and only hold half a dozen stocks, because I WANT the risk. I only have around 20% of my capital in half a dozen shares right now. I spend an hour a day checking things out in the market.
The advice you have been given has been sound, but I would urge you to be more professional in your approach. Fund managers have a lot of resources that you don't have, but from the quality of your approach, there is no reason why you can't do something better for less money.
Hope this helps.
King Lodos
Posted: 17 May 2018 18:11:46(UTC)
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PEG ratio's been very effective for me over the years .. I often use a PEGY (growth + dividend yield, as it offsets some of the higher growth achieved by companies paying out less).

What I think you really want to do is model what happens to a £1 invested in this business – what happens with margins, reinvestment, debt, look at trends in fundamentals – look at it more like a business than a stock .. Likewise considering the intangible aspects of the business – stick to sectors you really know.

Because the whole rise of ETFs and quants is about looking at stocks as metrics .. And if the aim is to do something different: then you probably have to be looking at them even more as businesses
hooligan
Posted: 17 May 2018 18:47:57(UTC)
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a couple of tricks/influences I use are "only buy what someone else wants" and "never buy anything advertizes on a formula 1 car".
i am quite anti all quant strategies, passive and "smart beta". to me they reek of communism and giving up. the adage i use here is that "market of individual stocks, not just a stock market". i like your views on treating companies as if you were the owner.
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King Lodos on 17/05/2018(UTC)
King Lodos
Posted: 17 May 2018 19:47:29(UTC)
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The problem with quants and ETFs from a trader's point of view is you've got your strategy on display .. Not a great tactic in what is essentially a game.

When an Investment Trust's about the be included in the FTSE 250, smart traders can buy it just before inclusion, and dump it just after .. someone's losing .. Fundamental indexes have to randomise their rebalance points now so they don't get front-run by traders too much.

It also sets a simple benchmark for you to construct better versions of the same strategies, and again: who's losing? .. There are a few interesting ones, like MOAT – but there's a paper 'On the Impossibility of Informationally Efficient Markets', and as quants/ETFs aren't *really* adding information about the companies they invest in, they've all got expiry dates .. I think real, business-focused managers are only thing you'll always have, because they'll always be necessary
hooligan
Posted: 17 May 2018 19:56:26(UTC)
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yep, you can't get QUALITY from a quant/idex solution. just the chance of an econre for something you have already witnessed. (same goes for central bank intervention).
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King Lodos on 17/05/2018(UTC)
Law Man
Posted: 17 May 2018 20:25:27(UTC)
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King Lodos and others give good guidance.

I consider myself reasonably knowledgeable about investment; but I know my limitations.

I started 20 years ago buying miscellaneous individual shares to see how it went. I had the benefit of good rising markets, and probably did about as well as the market - by chance.

8 years ago I transferred retirement policies into a SIPP. I spent many (many) hours reading and learning. I keep all my SIPP in collectives: mainly ITs, with some OEIC funds and ETFs. It is my retirement money so I am careful - well balanced by asset type and geography.

Recently I have prepared for a serious 'fun' portfolio in a separate account with a limited amount of money, to buy individual stocks. For over 6 months I have read about Mark Minervini's method. If you are going to deal in individual stocks, stick to one method. I expect to make money, but not a lot; and will give up if I lose after a year.

There are some people who have the skill and experience to deal in stocks. By all means give it a go, but only after you have learned a good selection method, and only with money you can afford to lose, not your retirement savings. Stick to collectives for them - knowing how to buy these is hard enough.
6 users thanked Law Man for this post.
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Aminatidi
Posted: 18 May 2018 06:44:17(UTC)
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Law Man;62465 wrote:
Recently I have prepared for a serious 'fun' portfolio in a separate account with a limited amount of money, to buy individual stocks. For over 6 months I have read about Mark Minervini's method. If you are going to deal in individual stocks, stick to one method. I expect to make money, but not a lot; and will give up if I lose after a year.


Pretty much what I've done, however I'm intending "fun" to mean "hopefully fairly safe".

So far I've put a small amount equally (as near as) into:

  • Apple
  • Domino's Pizza Inc
  • Microsoft
  • Visa
  • Nike

And will likely add Unilever and Diageo (seems almost obligatory) and Hargreaves Lansdown.

Nothing extraordinary, a little plagarism of Train and Smith and Ashworth-Lord plus hopefully realising that brand really matters (it was Nike or Adidas).

Of course now I'm wishing I'd purchased Ocado, yesterday morning, but in all seriousness I wouldn't have a hope in hell right now of being able to have judged that kind of purchase, but I think people will be buying iPhones, eating pizza's and wearing branded sportswear for some time to come and paying for it with a debit or credit card or using Apple Pay etc.

My hope is simply to try and emulate Warren Buffett in so much as "don't lose money" and anything beyond that is a bonus :)
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Pip Giddins on 18/05/2018(UTC)
Pip Giddins
Posted: 18 May 2018 11:13:12(UTC)
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Amanatidi: Thank you for your thoughts.

You have chosen a particular style, and chosen a reasonable, but not excessive, number of shares. Unilever and Diageo would be good additions.

I would not have 'missed gain regret' over Ocado. It is not in the same class style as your chosen shares. Of course we would all like a windfall gain, but it was not obvious before the recently announced trading agreement..

I take your point on 'fun': my intention was to sow that I shall deploy a modest amount to see how it goes, not risking serious hard won savings.

I wish you success.
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Aminatidi on 19/05/2018(UTC)
King Lodos
Posted: 18 May 2018 15:21:10(UTC)
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Just get in the habit of understanding and checking fundamentals early on

https://www.gurufocus.com/stock/NKE

I like Nike and Adidas .. I very nearly bought Adidas instead of Facebook .. But you *can* overpay .. I don't know whether Nike or Dominos justify their current valuations – they probably do, but you give yourself less margin for error
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Aminatidi on 19/05/2018(UTC)
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