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Lessons from the world's most successful investors

Here, you'll find in-depth interviews with a number of the world's most prolific investors. This series contains a treasure trove of impactful insights for DIY investors.

Robbie Burns: How to profit like the Naked Trader

Ben Hobson

Robbie Burns is one of the most popular figures in the UK investment scene. In many ways he’s both a finance rebel and investing hero, and to his legion of followers he’s best known as the Naked Trader.

The Naked Trader[1] was the title of Burns’ 2007 guide to ‘how anyone can make money trading shares’. Several updates followed, including Trade Like a Shark[2]. Over the years his loyal readers have followed him through booms, crashes, bubbles, successes and failures.

His popularity stems from no-nonsense, down-to-earth prose that literally laughs in the face of complicated investment speak. By keeping things simple, wearing mistakes on his sleeve and encouraging individual investment he’s built a successful brand around himself.

In essence, his book is about taking a checklist approach to trading. He suggests looking for profitable, growing companies that aren’t debt laden. Dividends are important (mainly to cover trading costs), the shares have to be reasonably priced and they need positive price momentum behind them.

Burns also takes a ruthless view on losing positions, cutting them early, often with a stop loss. It’s a strategy that makes a great deal of sense - blending growth, quality, value and momentum - but it needs discipline too.

We discussed all this over lunch at a lively Michelin-starred Italian restaurant on the banks of the Thames, just around the corner from his home in London.

Robbie, I suspect that behind your relaxed persona and easy going attitude is a ruthlessly disciplined investor. Would that be right?

Well, I think I treat the whole thing as a business. If things are getting out of control I just cut them. All my stuff is so simple I think people are quite surprised. They expect charts and lines, but it’s nothing like that.

I’m a weird mix. I’m happy-go-lucky in some departments but when it comes to trading, the main thing is that I treat it like a business. To win at trading you’ve got to be cold, calculating and really hard-hearted. Perhaps you even need to be a bit of a sh** in the trading element of it. Because in the end if you’re winning, somebody else is losing unfortunately. But you’ve done the homework and they haven’t, and that’s the way of the world. So I think you have to be quite ruthless, and if you’re nice you’re not going to cut it. In the United States they call it sharks and fishes - the sharks prey off the fishes.

You started trading full time just as the tech bubble was taking off in the late 1990s. What lessons did you learn in those early years?

I learnt a lot between 2000 and 2006, when I wrote the first book. I learnt from mistakes, so every time I made a mistake I asked myself: “why did I fu** this up and how can I stop it happening again?” It took four or five years of learning the ropes.

Coffee Republic was my worst mistake. I initially bought it because I liked the coffee. I remember quite clearly buying them at 28p, and then at 22p, more at 13p and then at 8p. But it was one of the best things ever because I remember feeling so happy when I finally cut it at 3p. I felt like I’d been released.

I suppose where I’ve been lucky is that I’ve only ever used my ISA allowances and I’m guessing I’ve put about about £40,000 into spread betting accounts. Even now, £15,000 a year is the only money I add. I try to leave the ISAs to run if I can, I wouldn’t imagine taking money out of them for a while. The spread bets are like lucky money, I don’t consider that I’ve got it until I actually bank it.

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Your strategy often picks up smaller companies, so with a growing pot of capital I guess you’ve had to be very conscious of the ability to get in and out of those shares when you’re trading sizeable sums?

I think it is harder now for me than it was. I guess if you’ve got a pot of £100,000 it is quite easy to be nimble and move in and out of stuff. But when you’ve got more than a million pounds in an ISA - I’ve got something like 65 positions - that makes things a bit harder.

I might have £100,000 of Paysafe and because it’s FTSE 250 I won’t have any trouble getting in and out of that. But with something like Next Fifteen Communications, I had about £40,000 and it did really well so I cut half of it. With £20,000 it should be quite easy to get out if I need to.

At one of my seminars a guy said that he’d bought £170,000 of Coms, which is a tiny penny share. He’d bought them at 10p, and that was his whole pot. I asked him if he realised that if he tried to sell the whole lot the market makers might only give him 1p for them. People don’t realise that the price is there, but only up to a certain amount of money. I know why he did it, he thought Coms would go to 50p and he’d be a millionaire. That was in his mind when he bought them. But at 7p you’ve lost £35,000. What are you going to do about it? Probably nothing. Then you read the bulletin boards where people are trying to encourage you to keep them or buy more. Now you’re in a terrible place. I said that if I was him I’d be selling as much of them as possible every day until I was down to around £10,000 worth. That’s what he should have had in the first place. But I knew that he wouldn’t do it and the shares are about 1p now. I think that happens to a lot of people.

There are a lot of psychological forces at work when it comes to buying and selling shares. How have you refined your process to deal with that?

What a lot of people think when they buy a share is that they’ve got a massive winner at some point. In my book Trade Like a Shark, I talk about confirmation bias, which to me is one of the most interesting things in psychology. What I say is that when you approach a share, approach it negatively. What are the bad points? What could go wrong with it and why could it be down 100% in six months? What is the risk involved with the share?

That’s where my net debt rule came in - I wouldn’t buy anything which had three times debt to profits. There was a share called Aero Inventory that I’d looked at, and it seemed fantastic. The profit was quite nice at about £33 million, but multiply that by three and net debt shouldn’t have been more than £100 million, but it was £450 million. I looked like an idiot for six weeks or so because the shares did go up. But they were suspended a few months later and it went bust.

So first you’ve got to say ‘what’s the risk?’, not ‘I’m going to make a million out of this’. The moment you do that you’ll be looking for all the reasons that confirm your decision to buy the share.

What else drives the decision for you to buy a share and what’s your process for building a position?

I look at my portfolio as a room with a massive door. Any share has to really, really bang on that door to get in. It has really got to have everything going for it.

Before I make the decision to buy, bearing in mind I’m always trying to put myself off, I look at the supply and demand - what’s Level 2 looking like? There is no point buying something where there’s no demand because it will just carrying on going down. That has saved me numerous times from getting into stinkers. If I see lots of sellers out there I wait. It’s quite simple because if you buy it on a strong Level 2, it should then rise. If it doesn’t, and it starts to go down, I have what I call my ‘get out quick’, and I’m just out.

Stop losses for me have changed. A stop loss to me is an emergency exit, way down the line, just in case something terrible happens. But on a new trade I’m much more likely to get out really fast. Then I’m only going to try two more times, a bit lower down. If I’ve tried three times with a share and it’s still not working, I just stop.

On the subject of stop losses, say one of your positions is up 50%. Would you still use a stop loss or is it no longer important?

No, I just top-slice as they go up usually, but I would recommend people to use a trailing stop well away from current price.

So your approach with new positions is to start small and then build up over time?

Exactly. I’ll start small with something and as it goes up I get more confident and average up. I would never average down now. Instead of averaging down it’s best to just get out. Otherwise, the longer you hold onto it the more you’re likely to hold it because you think it’s not worth selling. Psychologically it’s damaging. This is why airline pilots are such good traders, because they learn confirmation bias as part of their training.

Confirmation bias is a big thing, it’s very easy to find other people on the internet that agree with you. This is why bulletin boards are very dangerous. It’s what I mean when I say that I treat this like a business. I don’t look at bulletin boards, I look at cold hard figures, I look at what’s going on and I don’t care what anybody else thinks.

There is so much out there that you can look at that can confuse you. I’ve narrowed it down to a very small number of things. If it hasn’t got everything right then I at least keep an eye on what’s going wrong with it. I don’t think there’s anything wrong with taking the odd bit of high risk. Sometimes it pays off but you’ve got to do it to a small degree, and I just assume that I’ll lose the money. I think that probably takes a bit of my gambling instinct out of it, which I think everyone has.

What would be your definition of an ideal investment outcome?

Probably one that keeps going up slowly over time. One with dividends and no big worries and which might eventually get taken over. That was the case with GB Group, which went from 20p to 250p over seven years.

You’re obviously keen on spread betting, but do you think individual traders use it wisely?

I just use spread betting to supplement my ISAs and I don’t use that much leverage. For example, I’ve had a spread bet in Dignity for two years. It costs me 50p every night to keep it open, but that’s fine. After all, death isn’t going to go out of fashion, so who knows it might be open for the next five years. But you can keep longer-term things open in spread betting. It’s a great facility, and of course you can go short, which is great for you to be able to cover yourself.

The problem of course is that it can be addictive, which can lead you to use the leverage and overtrade. You have to use it very carefully. But you can have guaranteed stops, which is fantastic. Let’s say you were shorting something that could be bid for, with spread betting you can know your potential loss for definite. I would only do that where I felt there was just a chance something could be bid for where I was short. Say you were short Wm Morrison but you thought, ‘hang on, what happens if Tesco makes a surprise bid for it?’ That’s the way I look at it - I’m looking at the risk every time, trying to judge it.

What do you think is wrong with most of the trading ‘advice’ that investors are faced with?

Most start talking jargon very quickly and complicate things. The more I did this the more I realised I needed to un-complicate everything. Then I realised you could do that with everything in life. People go to these technical analysis seminars and they just get bulldozed. I say to them, ‘do you think your trainer was making any money, really?’ I wouldn’t dream of doing a seminar unless I could show them what I’d made in my accounts.

People are naturally cynical and I can understand that. I don’t look at bulletin boards or Twitter but I’m sure people say ‘ah, Robbie Burns makes it up’, or ‘he said he does this but he doesn’t’. I just think, ‘if only you could come and see’. But I can understand the cynicism.

One of the final points you make in your book is that it’s very easy to over-analyse a share. Do you think there’s a risk that you can talk yourself out of investing in anything?

Yes. But the thing is that if you buy it, you can get out if it starts to go down. So I can say to myself, ‘well I’m not 100% sure but Level 2 looks strong so I’ll give it a try’. If it doesn’t work out then I’m out. So although I think that everything has to be in my favour, if I’m not sure about a negative then I will probably give it a go if Level 2 looks good.

But having said that I don’t trade very often. If in doubt, do nowt, as they say. If you find yourself over-screening and pushing every button in sight then there is probably something going wrong. You’re panicking, you’re fearful or you’re greedy. You should stop yourself from pressing buttons that much and think before you click.

I think there’s also a risk of comfort trading. If you’re feeling bored you might trade without really thinking. Right now, when markets are going down there is no real stampede to buy. If you’re reasonably covered with a short there isn’t much to worry about selling either.

I don’t forecast the market, obviously I haven’t got the foggiest idea where the market will go. Some people say sell everything while others say it’s fine. But generally it’s the new trades that you’ve got to worry about. With a new trade you have to look after it, and if it starts to go down get out of it. But once I’m up by more than 20% I have a look from time to time. I’ve got many good trades still there from years ago like Avon Rubber and GB Group, which have multi-bagged.

You use short ETFs - including the SUK2 FTSE 100 2x Super Short ETF - to cover positions that you don’t want to sell. What are the signs you look for when getting in and out of those positions.

Yes, I have used ETFs to short the market in an ISA. They are great because if the market goes back up you sell and take a small loss. They are a brilliant insurance policy, and incidentally, you can get 3x and 5x short ETFs now.

Where do you think individual investors generally make mistakes?

People want to make money really fast. I think that if you try to chase money it will run away from you. You just need to bring it in slowly. But no-one is interested in that these days because they want to make their money now, and that’s why they lose.

Look at the markets. When fear is the utmost emotion, it’s a great time to buy. When everyone is feeling miserable, if you look at fundamentals, there are a lot of bargains out there. What’s amazing is how everyone is scared and then five minutes later everything is going up again - the market turns in an instant.

Build a strategy like Robbie Burns

Robbie Burns typically looks for good quality, growing companies with shares that have positive momentum but are still attractively valued.

Find out now which shares pass the rules of our Robbie Burns strategy screen.

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