New era, new month, new game plan as volatile speculative shares leave our strategy in tatters
The Investment Club’s first post-gilt era month was almost a complete disaster. The club’s remit is to have a gradually increasing unit price, something akin to how a theoretical with-profits fund is supposed to perform. However, at one point in mid January the club’s assets had shrivelled by about £2,000.
After decades out of the stock market, having been in the relative tranquillity of the fixed income arena, we thought our inexperience in the real-world stock market was going to be reflected in the club’s month-end unit price. Fortunately, at the closing bell it had dropped a relatively modest 2p to £3.11.
If the club starts to haemorrhage value at the mid-January rate we will have to bring the shutters down. Is there a solution to prevent this outcome?
The initial game plan emerging from the gilts age was to load up with good value FTSE 100 shares and then use the club’s paper and pencil (PAP) analysis to time our purchases and sales with the rise and fall of the FTSE 100. It was decided to split the cash raised from the liquidation of the club’s fixed income positions into 12.5 per cent tranches, equating to a sterling value of between £4,000 and £5,000. This would allow us to purchase up to eight different company shares on the FTSE, thereby spreading risk.
Did we stick to plan? No. What actually happened was we decided to spice up our portfolio with two rank outsiders.
To counter the recklessness we planned to also buy three large safe companies in the FTSE, another company with a possible large dividend and 12.5 per cent left as a reserve cash pile. Unfortunately, we actually purchased two lots of First Group instead of one.
Our sequence of purchases meant that we had already bought Aviva and Scottish & Southern Energy (SSE) in the FTSE, therefore could not purchase Vodafone because we had accidentally spent the money on First Group. The two outliers were Afren and FastJet.
Through inexperience what we were not prepared for was how exceedingly volatile speculative shares can be. FastJet fluctuated between a profit of just over £600 and a loss of £2,000. While the other shares jumped about a bit none was in FastJets’s volatility league.
By the close of January the club’s portfolio lay in tatters, thanks to two losses on Ardfen and FastJet. The club is again having to think out a new strategy to more closely reflect its remit of a steadily climbing unit price, or perhaps just stick rigidly to the original plan.
So it looks like new era, new month, new game plan. Given our current investments what we will do is abandon trying to use the PAP analysis to time purchases and sales. Instead, we’ll use it to time buy and sell points for individual shares in a bid to capture any profit a share makes by selling it and then trying to buy it back more cheaply.
While this is the holy grail of investing and every investor is trying to achieve this end one way or another to build up wealth, the club will be doing this to dampen volatility in the portfolio. This will entail a lot of additional work in comparison to our fixed income investing.
While we are very sceptical as to the strategy will work, we have to try a different tack to get some sort of stability back in the portfolio.
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Weather for Edinburgh
Tuesday 18 June 2013
Temperature: 10 C to 21 C
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