Folio Management | Value Farming Portfolio - Suggested Min Investment Amount

9th Sep '15 by Noodle Hat

19 comments 10408 reads

Hi all.

Planning on setting up a largely farming based quant approach for a value/greenblatt inspired portfolio and wanted to get people's thought on size/ complexity.

It will be in ISA's.
* 15 - 20 stocks
* what do people recommend minimum investment in each stock to make it worth while/efficient?
*I assume min £1000 per stock?
*using farming assume still fully diversify across sectors. *even weighted allocation.
* . Still need to decide holding and selling rules. Min 1 yr.
*plan to form portfolio gradually over 6 to 12 months

Many thanks.

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Noodle Hat

Premium Member

19 comments

Cuthbert C

10th Sep '15

frop

"...a largely farming based quant approach for a value/greenblatt inspired portfolio…"

I am afraid that I cannot decipher your post. I literally have no idea what it is you are thinking of doing. I suggest that you rephrase your question in less arcane/obscure terminology.

AlanJenkins2

10th Sep '15

From viewing bargains on Moneyam,I can tell you that £1,000 is too low.Even assuming you are trading online with a low rate of commission,your market impact costs will be too high - you will be charged more percentage-wise because your trades are too small.I wouldn't go below £3,000 and an average of £5,000.

dmjram

10th Sep '15

Morning frop,

£1000 is very low for an individual stock holiding - you'll find the fixed trading costs will tax a large share of your portfolio.

Suggest you run up a spreadsheet and see what charges you'll incur as a % and then take a view. With 15 - 20 stocks rebalancing annually, that will be at upwards of 30 trades a year (unless you're churn rate is low) which is £300+ with low online rates.

peterg

10th Sep '15

It depends -

On what sort of strategy you are going to use. Rate of rebalancing is important - if it's a strategy where you are likely to end up holding for 2-3 years then commission costs on £1000 holdings should be manageable. If you are going to be trading several times a year then commissions will become relatively large compared to the size of the investment.

And on the degree of diversification. I'd be inclined to start with fewer stocks held in larger amounts (say 5-10 at £2-3k), then build up the diversification as funds become available.

Also keep an eye on spreads - doesn't really impact so directly on pot size, since it's not flat rate, but if your strategy involves smaller, less liquid, stocks you can end up spending anything you might hope to gain on spreads when you trade.

Peter

Mark Simpson

10th Sep '15

Hi frop,

Unless you are clear about what your competitive advantage is in this space then this is unlikely to be successful. By Greenblatt I assume you mean his 'magic formula'? If so before you implement this then have a look at the work Tobias Carlisle has done analysing this. e.g. authors@google talk www.youtube.com/watch?v=1r1vJZ80Z7I or his Quantitive Value book.

Brief summary:

1. Straight Value beats Magic Formula.
2. Earnings yield prob best value metric = EBIT/EV.
3. Filtering out earnings manipulators and severely financially distressed firms improves returns.
4. Magic Formula over-weights ROCE which mean reverts.
5. Investors are really bad at choosing from a set of mechanical picks so go with the mechanical.

My thoughts:

1. 15 stocks no where near enough for a purely quantitive approach. See http://www.dangercapital.co.uk/2015/07/Diversification-Diworsification.html
2. Prob better just buying a Value ETF/Vanguard fund - then you get cheap, diversified value exposure from day 1.
3. If you are interested in investing then read lots and then use a small portion of your portfolio to invest directly but only after you have built up your passive value exposure. Expect to lose money for the first few years.
4. 1k chunks prob ok minimum for direct investments if you are holding long term not re-balancing. With 1k you are looking at holding or not, too small to scale positions.

HTH,

Mark

Rusty2

10th Sep '15

£1,000 may be low but if you are buying 15-20 shares then depends how much you have available in your ISA, ideally £2,000 or more would be better although I think trading costs are over emphasised by some, if it costs £12 on £1,000 that is 1.2% if on £2,000 if will be 0.6%, if your trading cost is £6 then it is 0.6% and 0.3%, the differences on shares held for years is not great, some shares its difficult to buy large amounts anyway. Go with what you are comfortable with. In this market I would say probably smaller amounts on wider spread of shares is better. I did a dummy folio based on NAPS in June, it has only gone up 2% and thats only because of one share Adept Telecom (LON:ADT). As for allocation I would cut down on Utilities and have more in Industrials. Yes same amount in in each share. Yes good point about spreads I would look to keep below 3%.

Edward Croft

10th Sep '15

Frop - you may find this a very helpful article on costs and numbers of holdings. http://www.stockopedia.com/content/when-does-it-pa...

Rusty2

10th Sep '15

Also Telecoms and Healthcare I would probably only have 1 company in each sector. I would replace with more from Consumer Cyclicals/Industrials. But see what your method comes up with.

AlanJenkins2

10th Sep '15

Peter,the snag with that is that 'good companies' can sometimes turn bad - so then you'd want to sell your shares.If a company's shares are so illiquid that its hard to buy more than £1,000-worth,you probably shouldn't be buying them at all.

peterg

10th Sep '15

Not quite sure what you are responding to there, Alan, I can't see that we disagree much or at all.

AlanJenkins2

10th Sep '15

Well,you talked of a two-to-three year hold strategy,which might make purchases as low as £1,000 - worth workable.My point was that sometimes you might want to sell sooner because a company began to do badly - in which case you would have less time to spread the higher costs over.

Rusty2

11th Sep '15

Its interesting debate if you have £20,000 to invest would you pick only 4-5 stocks to save on trading costs, or around 10 to 20 to have more diversification and less risk. I would probably go for 20, then build up when more funds were available. As you can see in NAPS: http://www.stockopedia.com/content/new-year-naps-top-10-stocks-for-2015-89568/

Diversification worked there as the top 2 performing shares were both 2nd choices

Cuthbert C

11th Sep '15

"if you have £20,000 to invest would you pick only 4-5 stocks to save on trading costs, or around 10 to 20 to have more diversification and less risk."

Why not invest in IT's to obtain diversification and leave direct equity investment - ie individual company shares - until you have reached critical mass - ie somewhere north of 20k

AlanJenkins2

11th Sep '15

Because the ITs have annual management charges.So you have to really like the management [Paul Scott used to run one,I think ! ] .

Rusty2

11th Sep '15

Because you have to start somewhere, the best way to learn is to invest. Also some ITs have not performed very well, in fact I have sold most of my ITs because they have performed poorly and have only just got back into profit. So you are saying you need over £50k to invest in shares?

Cuthbert C

11th Sep '15

IT's have costs like any other company and those are charged against their income but they do not make direct charges to investors. And their costs tend to be very low.

And many are trading at a discount to their NAV's so you get more of the underlying shares than you would if you bought them direct - which offsets the costs.

Of course some IT's perform poorly - that's in the nature of investment vehicles - but so do the shares of individual companies.

I'm not saying that you should never invest if you have less than 50k that's your figure not mine. But clearly investing small amounts in a spread of small holdings will increase your trading costs, whilst investing in fewer larger holdings will reduce your diversity and increase risk. I am simply pointing out that investing in IT's provides you with more diversity per pound/dollar than direct shareholdings do so tends to reduce risk.

Of course selection is critical but if you choose IT's with good managers they are likely to do reasonably well compared to a novice investor.

mpat89

12th Sep '15

Personally I believe the value approach requires a much higher number of shares as you are relying on few winners. In an ideal world you would be holding 50-100 shares.

Rusty2

12th Sep '15

I believe holding over 50 shares is too much to manage. It has been shown that value investing is very rewarding. If just starting 20 shares well spread over different sectors should give you enough diversification. Look at the NAPS that was done in January that was up 29% over 6 months.

Rusty2

12th Sep '15

With trading costs falling this maybe so not relevant, there are 2 brokers now charging around £2 per trade, so trading costs don't really come into it if you use low cost dealers? Several other brokers charge around £5-£6. Other charges are proportional the same on trading I believe, spread/stamp duty, in fact on large amounts you may need to do 2 or more trades or have a wider spread and can be more difficult to sell. So can limit your selection.

So where do you think is critical mass?

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Value farming portfolio - suggested min investment amount

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Noodle Hat

19 comments

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