Busy day Saturday, off to Nottingham to watch the Hatters take on Notts County and on a fairly tight time schedule and not really expecting a call from Matt to talk about shares as he ponders if the stock market is really a place for him rather than leaving his spare money, the stuff he definitely does not intend to use for the immediate few years, safely tucked away in the bank/building society. I must admit after my last discussion with Matt just over a week ago, I rather felt that he had almost already decided that it would not be for him.
Anyway, Matt is today all fired up with enthusiasm as the phantom portfolio I am using to teach him a little about the markets with is up by about 3% since we opened it. Oh no, I think to myself, from “don’t like the risk of losing money” Matt has now turned to “do like the idea of making easy money”. Ok, I tell Matt, not a bad start but it’s really little more than noise in the grand scheme of things. Investment, particularly in neglected/value stocks is not about performance over 9 days, 9 weeks: to my view, sticking with 9 you are more realistically looking at 9 months to a couple or so years. Of course, this unwelcome damp cloth place on Matt’s smouldering enthusiasm did not go down well as I could tell by Matt’s hesitant response “well, I sort of thought that things looked good, don’t you”?
Well Matt, let’s look at the very choppy waters that these six stocks have to sail through over the coming five weeks. The dodgy time for stocks are Matt is usually when they release either trading updates, interim results and final results. Why do I say dodgy? It’s then that they give us an account of how current trading is going; historic performance does not really matter that much as it’s all generally built into the share price; what the market really wants to know is how are things going now, what does the order book look like?
Now for each of these six stocks I have discussed their fundamentals on my Stockwhittler site in the past, so Matt, check back there if you feel the need. However, do look at the following schedule of news release and brace yourself; the current trading will most probably be in-line i.e. no shocks and as expected. However, it could well be a touch negative or hopefully a touch positive.
The dates to put in your diary Matt are:
3/11/16: Final results (year-end) for beaten up Gattaca; yes, what a silly name for a company; what was wrong with Matchtech? Also, yield > 6%
17/11/16: Interim (1/2 year) results for Norcros; I like the company but the market seems scared by the pension deficit which I see as well mitigated. The average age of those collecting pension from the fund is late 70’s so without wishing to sound overly callous, it’s overall liability will shrink fairly rapidly in the coming few years. Just one little negative phrase and the shares will fall a few pence. Norcros is a strange one to get your head round in terms of basic numbers; the yield is just about the same as PE; crazily undervalued or the territory for a fool?
29/11/16: Final results for Topps Tiles: the market was spooked by their last trading update; me, I thought it was fine for the medium term but that’s what investing is about, taking a view.
30/11/16: Telford Homes Interim Results: I really like this share but the market seems to be very suspicious of it and it was heavily brexited back in the summer. Am I right, well very positive noises from the company suggest all is well but we will have to wait and see: yield about 5%.
01/12/16: Character Group Final Results: certainly not loved over the last 12 months but has Mr market got it wrong? I suspect Mr Market has got it wrong but there again, just my view!
08/12/16: Waterman interim dividend: ok nice to have Matt but you have to remember that the share price invariably falls by the same amount as the dividend paid on ex-dividend day.
Do remember Matt, that I am not always right with my perception of a company; like all investors, I certainly make my fair share of purchases that in retrospect don’t head in the desired direction but that’s investing. When I get things wrong, I try to close my position as soon as I hit the appropriate stop loss but when I am right I try to be brave and ride the wave as high as I reasonably can.
So, Matt, that’s a little bit of interest and worry for you over the coming weeks; your theoretical 3% gain could so easily be a -10% loss or more within five weeks with all of this news about to be released: could you sleep easy with that Matt?
I have to dash for a train now as a couple of foaming pints of ale await me in Nottingham; catch you soon once the news flow begins
Oh dear, this investment lark can be a worry. Well, I need to qualify that remark as it’s not so much a worry with my own money as I understand the risks about stock market investment and I am happy enough with those risks. What is a worry is discussing possible ways to invest a spare few £000’s that a close relative may have tucked away under the mattress. Anyway, such a discussion came up recently with a relative who had a few thousand pounds totally frustrating him as it was essentially doing nothing for him in terms of increasing the size of his wealth. For reasons of amusement and anonymity of the said relative, I will describe the tale in a story style conversation.
Oh yes, before I do that I had better give the relative a name to spare his blushes; I will call him Matt and of course his surname will be Ress; come on keep up, MattRess, got it!
So onto the conversation:-
Well, Matt comes along to see me after much worry about his investments that are sitting in a simple interest account at his bank. Matt is really frustrated as in total on this spare £15000 he is earning in the order of £130 a year interest which in real terms he considers to be an erosion of this spare chunk of cash. Matt asks my advice regarding what he should do with such an amount of cash to make the cash work harder for him and make at least a decent return of his cash. Well, no surprises there as the answer is simple “sorry Matt I never give advice to others regarding investments”. Of course, Matt was very frustrated with my blank & closed response, this was not at all what he was looking for from his once favourite uncle who was becoming less of a favourite by the minute.
I then reasoned with Matt that at least having his money where it sits at the moment does not expose that money to any real risks other than the bank going bust but even then he would eventually get all of his money back. Now Matt was not going to let this one go away and asked my general views on investment that fits with my character.
Ok, I said but let me give you a little old fashioned advice in bullet point form below:
To spread the risk, we will in this practice portfolio have six stocks; why six? Well, Matt, it’s to spread the risk. For example if one company comes out with a dreaded profits warning and the share price immediately falls by 25% that would be a bit of a disaster if you only held that one share. However, if that share was one of a number within a basket of shares, in our example six shares, the overall hit on the portfolio would be much, much less, say about 4%. Ok, Matt said, as he grasped that point but then went on to say won't that have the opposite effect if one of your shares goes up by 25%? Well, of course, it will but this is what we call risk management: remember that greed can kill!
So, on we went to create this portfolio investing a hypothetical £2500 in each of the following six stocks: Character Group (CCT), Gattaca (GATC), Norcros (NXR), Telford Homes (TEF), Topps Tiles (TPT) and Waterman (WTM). Once we had entered our “buys” into SharePad and taken account of those odd little annoyances such as the bid/offer spread, the brokers charge (even at a bargain £5) and the stamp duty of 0.5% on main-market listed shares (we don’t pay stamp duty as a rule on AIM shares) Matt’s portfolio of pretend £15000 cash had already fallen an amazing £280 in value without any real movement in the prices of these shares. Oh hell, said Matt that’s equivalent to a weeks holiday in Benidorm. Ok, I did go on to tell Matt that all things being equal and assuming that the stock prices remained stable for the next 12 months he would receive a theoretical batch of dividends of about £780 that could, with luck leave him £500 better off. By the look on Matt’s face, I could tell he was a worried chap, all of this risk for maybe making £500 in dividends and that in itself could be badly hit if one or more of these companies hits a really rough patch.
Matt’s final words were to say that he was glad it was only pretend money and not his own as the thought of actually losing money was not one that appealed to him greatly.
So, we will leave it there for now and come back shortly for another chat with Matt as his education continues.Well, we were going to do just that but as Matt looks at the screen his “losses” have now in a few minutes have shrunk to only -£188. How can that be, asked Matt? Well, Matt, I said, the stock market is a dynamic beast; it moves all of the time and the tool we need to use is one called patience. One great investor famously said “I make more money simply sitting on my hands and being patient”: do you think you would be comfortable showing patience Matt?
Matt’s “portfolio valuation” a couple of hours after creation is now given in the SharePad table below:
Note: I should point out that as well as researching this batch of stocks, I currently hold positions in all six stocks mentioned in this article. However, my risk balance for any of these six stocks is actually much more favourable than in Matt’s portfolio as the size of my basket is currently 36 stocks. So should any one stock suffer the dreaded profits warning and slide by 25% then it’s effect on the overall portfolio would be no more than an annoyance.
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