Asymmetric risk and the referendum conundrum

Wednesday, Jun 08 2016 by

I am retired and my income comes from my SIPP which is in drawdown and my life savings which are in ISAs.

For me the impact/importance of gains and losses is significantly asymmetric. For me it is much more important to avoid losses than it is to obtain gains.

This was why I bailed out of oil last year or whenever it was, just before the collapse. It was not so much that I thought a prolonged downturn was imminent, it was simply that I did not want to take a risk where the downside could inflict serious damage, where the probability of that event seemed non-trivial and where any recovery could be delayed far into the future.

I feel much the same now about the EU referendum. The two sides are running neck and neck and the result is too close to call. As I see it, if we vote for BREXIT then it is entirely possible that the markets will pull back sharply. Given the pre-poll scare-mongering by the REMAIN side that would be entirely unsurprising. In effect the PM and the Chancellor have primed markets to interpret EXIT as disastrous, so why wouldn't they do just that?

On the other hand, if we REMAIN then I can see the markets enjoying a gentle boost as relief washes over everyone, but I would not see it as catastrophic if I miss that.

I should say that I am not sophisticated enough to get into hedging or even simple shorting.

In view of the above I have sold many of my holdings. I am now
40% in cash
40% in a range of preference shares - that's down from a few months ago.
20% in just a few high conviction share holdings

I may or may not sell more before the referendum is upon us.

I do not know what will happen if we vote LEAVE, but it could be very ugly for a while. If so, there could be good opportunities to re-enter at lower prices or to re-enter at lower risk.

If we REMAIN there will probably be a relief rally but I feel relaxed about missing the early stages of that and would then be able to re-enter again at lower risk.

Unlock this article instantly by logging into your account

Don’t have an account? Register for free and we’ll get out your way


The author may hold shares in this company. All opinions are his own. You should check any statements that appear factual and seek independent professional advice before making any investment decision.

Do you like this Post?
14 thumbs up
1 thumb down
Share this post with friends

15 Posts on this Thread show/hide all

tournesol 14th Jun '16 1 of 15


With Brexit now looking like the most likely outcome I have sold up my entire portfolio - pref shares and all -and am now 100% in cash.

The last time this occurred was when I decided to exit from a primarily oil E&P focussed strategy and that turned out well and avoided significant losses.

My game plan now is to wait for events around the referendum to unfold and then re-enter the market when the risk/reward balance looks more attractive. Part of my long term strategic planning (ROFL) is to move away from individual stocks towards collectives in the form of investment trusts. I've been prevaricating about that move for some time - endlessly waiting for existing holdings to reach an optimum level before harvesting gains and exiting. Well I've now exited, so the way is clear for me to transition to IT's when I come back.

I'm not in any way advocating the above as a strategy for anyone else. Nor am I trying to second guess market movements. All I am doing is deciding to sit out a round where the risk of significant short term losses seems quite high and the chance of significant gains seems quite low. This time next month or in 3 or 6 months I will have the same amount as I have today (leastways in local currency) and will be able to rejoin the game with equanimity.

For the moment the game is too unpredictable and the results too random for my liking.

| Link | Share
Maddox 15th Jun '16 2 of 15

Hi tournesol,

Can't fault your logic - an excellent piece of clear rational thinking and decisive action taken - impressive!

I'm not in your circumstances - still working and pretty much fully invested. With a binary outcome of uncertain consequences one is forced to take a view. I hope and believe that the vote will be for remain - and thus oriented towards taking the up-side of the market relief.

On the other hand, I do think that the impact of a leave vote will be significant in both the short-term, and long-term. The cost of hedging is a real cost and in the long-term I cannot isolate my portfolio from that - and will just have to deal with it.

I'd appreciate you picking holes in my logic if you see them?

Regards, Maddox

| Link | Share
kalkanite 15th Jun '16 3 of 15


Your logic is sound. I consider myself a student of Warren Buffet who's holding period is forever, however I'm not as clever at Warren at picking companies that will grow well into the future despite war, famine and death so I am minded of his first 2 rules of investing which is something like this:

Rule #1 Don't lose money
Rule #2 Don't forget rule #1

I think it is really important that an investor knows himself very well. While some investors have the mental ability to ride out a storm and sit tight while chaos ensues around them, then it makes sense to sit tight. But not everyone is like that. If you are someone that watches the price of your shares throughout the day every day and fret over the down turns, then selling up and waiting for the calm to return is the sensible option. Most investors lie somewhere between these two mind-sets which is why it is so important for investors to define where they are in this spectrum.

I find myself somewhere between midway and being able to sit tight on that scale, however if I have a high conviction about a company I will load up and sit tight regardless so long as the business reasons for investing in that company doesn't change. I am a focused investor, so I tend to hold around 6 to 10 investments (I include a cash holding as an investment).

To add to this, I am in the process of extending/refurbishing my house. Today I am moving furniture to a storage area in anticipation to moving out in one months time for a period of 3 months while the builders take over and finish off their work. Just the turmoil of the unsettling building work is enough to traumatise the grey matter.

I mention the above because each individual has differing psychological mind-sets, add to this the myriad of events that individuals may be experiencing at this time, it really is a case of doing what you are most comfortable with. What will make you sleep easier at nights?

I had been thinking through yesterday what I should do, I had about 28% cash anyway, unlike Warren I don't have an insurance company with an enormous float that I could dip into when stocks get crazily cheap so I tend to hold cash for these events. I also wanted to preserve what has been an excellent year for me, mainly due to my 38.7% of my portfolio being invested in HOME at the start of the year which I sold for a quick 50% gain.

Looking at my portfolio I decided to sell my Next and Restaurant shares and sell some of my JDG shares which I executed this morning (I had already sold my Goodwin shares earlier in the week) fortunately NXT & RTN are liquid shares that enabled me to do this.

My portfolio is now as follows:

Cash 43.8%
SRT 41.2%
ZYT 11.3%
JDG 3.7%

I hear a few gasps from the above but I am very comfortable holding SRT and believe that in 2 years time the company will be doing very well indeed.

All the best


| Link | Share
crazycoops 15th Jun '16 4 of 15

Kalkanite, I took very similar action to you last week and also find myself in a similar situation (except in my case i am moving house later in the summer which has its own disruptions). Prior to last week's trades I held 24 shares (all long). Two I sold out of completely - ALU and NXR as I didn't have a strong enough conviction. Technically, I still hold 22 shares but 15 of those have been sold down to "nominal" level - I can't explain this other than I tend to follow them more closely even if I retain just a nominal holding. These are all profitable trading companies, paying a dividend and I intend to buy back into these once the summer turmoil has ended (or maybe after the US election). Which leaves me with the following (in round numbers as i only calculate and review portfolio weightings every 2-4 weeks):

Cash 58%
Nominal holdings 2%
NWT 2%
PEG 1%
ZYT 4%
SRT 10%
GVC 10%
IOF 8%

By way of rationale:

Cash - while it does mean I am largely protected from this Brexit debacle, it also means I have potentially given up quite a lot in dividends, depending on when I choose to renter the market. I really don't like having so much in cash but the risks began to look too high to stay fully invested.

BVXP and ZYT - these are both long-term high conviction shares for me and I intend to potentially double my holdings in each by the end of this year. I can even live with the continuing falls in ZYT this week because it means I should be able to add at a significantly lower price.

NWT and PEG - these are both fun punts and sufficiently illiquid that I deemed them worth holding onto.

The other three are what I regard as "special situations" and ones where I am comfortable having overweight positions.

GVC - the main reason for staying in these is because they will likely gain a premium listing and enter the FTSE 250 in September. Thereafter, i expect there will be a refinancing deal early in 2017 and a return to dividends.

SRT - I believe the market has not properly priced in their mega deal with Indonesia in March, plus there is a good chance further such deals will follow in the current fiscal year. As the timing of these deals is difficult to predict, I decided that it was better to be in than out, although in the absence of these deals and a Leave vote, I can see them falling back to 30p in the short-term. I am comfortable with that because I can see them going a lot higher over the next 2-3 years.

IOF - I am still kicking myself for not banking more profits when these 10 bagged for me a couple of years ago but we are where we are and I now know a lot more about the iodine market than I ever wanted to. There are primarily a play on the iodine price which I believe has just begun reversing from multi-year lows do again, I would rather be in than out at this juncture. Most sensible investors would regard these as ridiculously high risk and more so to have such a high weighting in them, so I'll leave it there for now.

I also have an unusual private equity holding in the US that could be worth up to 25% of my portfolio in 2-3 years but equally, it could be worth nowt, so I don't include it in my portfolio calculations. I also have no control over the exit strategy of this holding. However, it does mean I pay quite close attention to the US and the prospect of Trump becoming President scares me more than the Brexit vote - hence, I will probably keep some of my powder dry until the result of that election - perhaps reinvesting half of my cash after Brexit and half after the US election.

To be frank, I have no idea whether I have made the right call here but I currently feel comfortable with my decision making, even though I'm sure most would raise an eyebrow or two over my special situation holdings. In the interests of full disclosure, I have been researching AAZ this week and might consider an entry level purchase over the next week or so.


Blog: Share Knowledge
| Link | Share
kalkanite 15th Jun '16 5 of 15

Hi Crazycoops

Thanks for sharing your holdings. Very nice cash position should there be a Brexit and if Remain wins then we both miss out on a quick rebound, but the important thing is that we are comfortable with our positions.

Totally agree re SRT, I started building up my holding after the Mar 9th contract announcement. I think ZYT is a real bargain at the moment but time will see. BVXP I have been tempted to buy on many occasions but never actually got round to doing it.

Good luck


| Link | Share
Alanjames999 15th Jun '16 6 of 15

i've gone heavy in cash/gold&silver ETF some gold mining shares (including in AU) and have about 30% still in shares.

I will be interested to see a in/out poll on here to see what the subscribers are leaning towards :)

| Link | Share
tournesol 24th Jun '16 7 of 15

I don't want to say I told you so, but......

It seems to me that the lesson is that one (possibly the only one) advantage of PI's over institutional investors is nimbleness and the ability to go liquid easily.

To put it another way, When storm clouds gather and thunder starts to rumble overhead, the PI can bring his washing in off the line. The big guys can't. What is the point of leaving the laundry out in the rain?

The job now is to figure out when it's a good time to go back out again.

| Link | Share
crazycoops 24th Jun '16 8 of 15

I think I will probably keep my cash pile largely on the sidelines until the future becomes clearer, including the outcome of the US election. Yes, there will be some "bargains" around but until the trading picture for those companies becomes clearer, who will be the next PM and how the UK's exit from the EU will unravel in practical terms, there are still many uncertainties. Plus, it's the summer and I'd rather be out and about than glued to my screen.

Right up until I woke up this morning I was convinced I had made the wrong call by moving so heavily into cash but as we know, even a broken clock is right twice a day :)

Blog: Share Knowledge
| Link | Share
Maddox 26th Jul '16 9 of 15

OK so I was wrong - I stayed fully invested, didn't hedge at all and the vote was for Brexit.

However, four week post-Brexit my portfolio has hit a new high - so it turns out I made the right decision but for the wrong reasons. I can't say I'm delighted by the vote and I not even sure what I can learn from the mistake? Nevertheless, I'm sure I'd feel a lot worse if I was substantially down. Question is, where are we going from here?

| Link | Share
Mechanical Bull 2nd Aug '16 10 of 15

An interesting thread that I missed earlier and I am pleased it has been resurrected.

My logic in the lead up to the referendum was similar. The downside risk of a Leave vote seemed larger that the upside potential of a Remain vote. Therefore, increasing my cash position seemed a logical course of action.

However, despite the initial Brexit shock, the markets have confounded expectations (at least mine!) and have surpassed even their pre-referendum levels. Markets are supposed to dislike uncertainty and the future seems more uncertain now than at any time since the final quarter of 2008. Sure, the decline in sterling and the positive impact on foreign earnings of FTSE 100 firms can partly explain the rise. Other factors could include the coronation and calming influence of Theresa May, the lack of any sustained impact on global markets, and the lack of investment alternatives.

But for me the balance of risk has not changed. Given that the FTSE 100 is at 6638 now, which level is more likely to be hit first: 5975 (a 10% drop) or 7302 (a 10% gain)? It is impossible rule anything out, but the evidence suggests that the UK is likely heading for a recession. I also think there are major risks around Brexit in terms of path that will be followed to exit the EU. Although there is a route that could be taken that could be beneficial to the economy (even in the short term)  it is more likely that those in charge will make a complete mess of things. For this reason, a drop to below 6000 seems far more likely and so it doesn't make a lot of sense to increase exposure to UK stocks.

So what is the answer? The time has come to broaden my exposure beyond UK stocks. As a NZ citizen, I already had some cash tied up in NZ and I have moved some more across with a view to gaining exposure to NZ and Australian shares through a local share trading account. NZ stocks generally look quite pricey, but Australian stocks look a bit better value. The plan is just to apply the rules from my mechanical system. The crew at Stockopedia will also be pleased to hear that I have just upgraded my Stockopedia subscription!

Blog: Mechanical Bull Blog
| Link | Share
TangoDoc 2nd Aug '16 11 of 15

I really believed that Remain would just squeak home so was surprised that Leave won. I had toyed with the idea of selling up but felt no pressure nor did I apply the cool logic I admire in tournesol's assessment, though I read it and gave it some consideration. I did nothing but as I noted a recovery that looked as if it had legs, I sold some RDSB shares that had been on a vague transfer list and rose to a level I had no faith were sustainable, partly because that seemed wise anyway and because several companies I had my eye on were now better value,  I needed to free cash within my ISA, already fully subscribed for the year. As it now stands, the entire portfolio is 1.4% below the pre-vote level, while the expected income, (assuming promises are kept of course) is 2.1% higher.

So far, so chipper. However, I anticipate a honeymoon period for Theresa May and the reality is that until Article 50 is invoked, it could well be that UK plc will be "open for business as usual", possibly at least until October and November. The PM has intimated that she has no intention of pushing the A50 button during 2016. it will be interesting to see what she means by wanting to get some agreements before she goes for it and, as some have suggested, even if she really wants to do it at all. If this has been the equivalent of a "phoney war", will invoking Article 50 become the real thing?

| Link | Share
LongbeardRanger 2nd Aug '16 12 of 15

Yes, this is a very interesting thread.

I too admired Tournesol's cool and detached analysis. And I too did not copy it, and now find myself in the surprising position of having a portfolio that is more valuable than before the referendum (in sterling terms at least).

I think the reason for this is that I have a reasonably well diversified portfolio - currently 26 different direct shareholdings, a large number of which are multinational / export led, as well as a fairly wide asset allocation across gilts, corporate bonds, gold, investment trusts, holdings in global funds etc. So undoubtedly a number of my positions have merely increased in value to reflect the fall in sterling.

To me, this really demonstrates the benefits of wide diversification. Much though we think of Brexit as a seismic event (which for us as UK citizens is probably right), from a global investment perspective it really is nothing out of the ordinary. (By which I mean, it's not any more earth shattering than any number of previous geo-political upheavals.)

| Link | Share | 1 reply
TangoDoc 3rd Aug '16 13 of 15

In reply to post #145341

I agree that whatever happens, life goes on and I too have a very wide portfolio. I used to think it held too many stocks (varies between 25 and 30) and I look from time to time to reduce and usually finally decide to keep my hands off it because my underlying philosophy still holds. It has always been to reliably raise over 5% dividend yield and reinvest. I refuse to have sleepless nights.

I am profoundly cynical about how finance and politics are intertwined. I believe the seriously rich run the world to stay seriously rich and in a small way, by owning a piece of their world, we roll along in their wake as investors. We only lose significantly if we are short-termist or buy shares with borrowed money. I just read a thread on this site about charting and technical analysis and it seemed to me that its adherents want so much more than I do. Maybe, in my own eyes, I'm already rich enough?

| Link | Share | 1 reply
PhilH 3rd Aug '16 14 of 15

In reply to post #145392

Hi TangoDoc,

I believe the seriously rich run the world to stay seriously rich and in a small way, by owning a piece of their world, we roll along in their wake as investors.

I just read a thread on this site about charting and technical analysis and it seemed to me that its adherents want so much more than I do. Maybe, in my own eyes, I'm already rich enough?

I agree that most members of the public are screwed by the seriously rich. For example, they 'manage' our pension investments are we're delighted when they beat the market by a few % whilst they are creaming off huge profits for themselves.

I'm one of those that integrate TA into my approach and by no means am I looking to run a risky portfolio at the expense of huge profits.

I'll post back on the other thread to show the risk profile of my investments over the last 3 years.

Best of luck

Professional Services: Sunflower Counselling
| Link | Share
kalkanite 3rd Aug '16 15 of 15

TangoDoc said.....

I am profoundly cynical about how finance and politics are intertwined. I believe the seriously rich run the world to stay seriously rich and in a small way, by owning a piece of their world, we roll along in their wake as investors.

That is so true.......

Twenty-five hedge fund managers took home $21.2 billion in 2013 for delivering an average performance of 9.1%, versus the 32.4% you could have made in an index fund. It's a great business to work in -- not so much to invest in.

We need websites like Stockopedia to educate investors so that they can make better investment decisions, most people don't have the time to invest themselves.


| Link | Share

Please subscribe to submit a comment

Stock Picking Tutorial Centre

Let’s get you setup so you get the most out of our service
Done, Let's add some stocks
Brilliant - You've created a folio! Now let's add some stocks to it.

  • Apple (AAPL)

  • Shell (RDSA)

  • Twitter (TWTR)

  • Volkswagon AG (VOK)

  • McDonalds (MCD)

  • Vodafone (VOD)

  • Barratt Homes (BDEV)

  • Microsoft (MSFT)

  • Tesco (TSCO)
Save and show me my analysis