What is the art of selecting shares to buy for your
portfolio? Well the usual mantra is to
buy low, and, sell high, which is only applicable if you are purchasing shares
to hold (known in the trade as a long position) in the hope that there share
price will increase. Another well known
phrase is also to make sure you do your own in depth research. How true is this? It seems that investment banks, etc., have
vast armies of people researching companies, and, how can you hope to beat them? In addition certainly in my own case you
sometimes have an in built aversion to certain types of companies which may
affect your judgement and not always for the better.
Take for instance the company ASOS (which stands for “As
Seen On Screen”). This is an internet
clothing and accessory business. My own
bias of this type of company is that it may potentially be one that lacks
longevity, and, because of its high PE (price to earnings ratio) be of a risky
nature. Whilst these statements may be
true, my bias of this company would have stopped me benefiting from a fabulous
share return. At the end of August, 2009
the shares were priced at 330p, peaking at 7195p (a 2,180% increase) in
February, 2014, with the most recent price being 2189p (a 663% rise from August, 2009).
Whilst this sort of share performance is not the norm (if
only!) it shows how because of my own prejudice I would have missed out. Another important factor it also demonstrates,
is the potential importance of stop losses.
Setting a trailing stop loss (even at 20%) on the share would have locked
in a profit at 5756p (a 1,744% rise).
In order to try, and, see if my theory has any mileage, I
am going to create a virtual portfolio.
All the shares in the portfolio will be chosen at random. I have obtained a list of companies that are traded
on the London Stock exchange, and, will choose the companies based on
generating a random number in Excel, which will be used to select the company
that occupies that position on the list.
The following rules will also be applied to the virtual portfolio:-
- Only companies listed in pounds sterling will be
chosen, this will for the time being eliminate any exchange rate risk;
- The company must have tradeable ordinary shares,
but can be on any market e.g. the AIM (Alternative Investment Market);
- In calculating the return of the portfolio I
will use a commission rate of £12.50, and, take into account any stamp duty
charge;
- An amount of £1,000 including costs will be
invested in each company;
- A trailing stop loss of 20% will be applied to
every share holding;
I will start the portfolio with five shares, and, then
add one per week for the foreseeable future.
I will not research the shares until after they have been added to the
portfolio, at which time I will research the company to see if I would have
ever considered it for an actual purchase in my real portfolio.
It may seem like a balmy suggestion to create this
virtual portfolio, but I was thinking that really all companies through their Directors
have the responsibility to create share holder value. If they don’t they should be replaced. I understand companies cannot keep growing indefinitely,
but those that are at a standstill should through their dividend be
providing a return to investors, which is greater than the risk free rate of
return available through a bank or building society. I accept this is outside the control of the Directors,
as the share price is ultimately controlled by supply and demand in the market,
but the Directors should state that the company is unlikely to grow
significantly in order to give transparency to the market.
So there we have it.
I will be generating the start of the portfolio over the next week, so
keep an eye out, and, don’t forget to check back to see how it is
performing. As always any comments you
may wish to make will be gratefully received.
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