What style suits me?

8th Feb '20 by timthegambler21

10 comments 701 reads

Hello.

I'm looking for advice. I'd like to set up a stock portfolio, have some cash (5 figures), have been interested in shares for several years but am inexperienced. I want to know if there is a philosophy of buying and selling that suits me.

My previous purchases have been in my own company, I work for a large insurer, and have done well as I can generally tell when it's over or under priced. Outside of that I've tended to buy large caps after big price drops if I believe they are cheap with mixed results.

I'm not risk adverse, happy to hold a stock for years, and would like to own companies without fundamental flaws to their business model, largely bought when the market is treating them badly. I'm not sure I'd trade frequently, and wouldn't mind taking big bets if I feel it's an intelligent risk.

I've looked at a few styles and am feeling a little overwhelmed.

Thanks,

Tim

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Howard Marx

8th Feb '20

Tim

Stockopedia have used academic research to identify which factors have persistently contributed to outperformance - Quality, Value & Momentum.

From your description you would appear to be a contrarian investor, favouring high quality, safe, cheap stocks - the intersection of Quality & Value.

As you identify, it's important to identify a style that suits your personality to ensure that you remain committed during the inevitable periods of underperformance.

If you look in the Stockopedia Help section you'll find plenty of information as how to screen for such stocks. This webinar is particularly useful:

https://www.youtube.com/watch?v=GICubyTFE6Q

timthegambler21

Thanks

Silver Moon

Why should Large Caps have big price drops without good reason? And if the reason is good, avoid!

Silver Moon,

Share prices are far more volatile than is justified by the fundamentals. Investor risk appetite can swing from euphoria to fear and back again multiple times in a 52 week period. Even the Large & Megacaps are prone to sizeable volatility.

For example within the FTSE-100, there is a huge 50% average gap between 52 week High & 52 week Low for each of the stocks in the 52 weeks to 7th of February.

Gromley

A really useful observation their from Howard on the StockRank styles.

There is also lots of discussion on the boards about the merits of different styles, unfortunately it is nigh on impossible to search for past content on the Stockopedia boards, but I did remember that there was an interesting discussion on the subject in Ed's latest 'NAPS' posting.

This link takes you to one of my posts on the thread which shows the performance of the various factor pairings that effectively represent the StockRank styles.

Contrarian (QV) has actually been the worst performing of the positive styles, over the last 6 1/2 years.

It feels to me that there is a lot of talk around,that momentum is the only game in town; that sort of crowd think makes me feel positively contrarian! Although who knows what the timescales might be for any possible reversal the hierarchy of styles?

Actually when I first read the question in the original post I was originally thinking of investing style in terms of : trader vs LTBH, diversification vs concentration.

Well a few things come immediately to mind.

You mention a five figure sum, well that is a fairly broad spectrum and I am not seeking to pry, but at the bottom end of that range, you could probably only have about 10 positions before dealing costs became a major drain and that is pretty concentrated in my view. Which would suggest (to me) investing in quite conservative stocks.

But you say : "I'm not risk adverse, happy to hold a stock for years, and would like to own companies without fundamental flaws to their business model, largely bought when the market is treating them badly. I'm not sure I'd trade frequently, and wouldn't mind taking big bets if I feel it's an intelligent risk."

That I think speaks of wanting to have a fairly concentrated portfolio of potentially quite risky stocks.

Personally that is not something I would be comfortable with, although it does represent my style of (ahem) a 'few' years ago when I was starting out. I had a couple of early successes with this approach and convinced myself I was a genius. Inevitably I learned that I wasn't quite as much of a stock market genius as I thought. At that stage my investing portfolio was comparatively small and therefore the value of the lesson more than offset it;'s cost; but that is certainly a consideration.

Being highly concentrated in stocks that have been 'badly treated' by the market; takes a lot of work and expertise to be sure that they haven't been badly treated because they are actually bad. Even then there is the potential to be hit by the unknown unknowns.

With that in mind, the main advice I can think of is to consider, what your objectives are, what your strengths and skills are and what do you need to learn more about.

Unless you have more patience than me, you probably be keen to just get cracking - so just be careful out there!

William K

9th Feb '20

It's alway up to individuals to determine their own strategy according to appetite for risk and time horizon. We all make mistakes as we go along and the important thing is to learn from them. There's a lot to be said for investing in tracker funds and forgetting about them until one needs the money. But it's not so much fun as stock picking.

Over the last 8 months I've been experimenting with the following simple set of rules:

Price > 200 MA

Stockopedia stock rank > 80

Net profit > Net debt

The capitalisation values of the companies ranged from about £500 million to £73 billion with a median around £ 4billion. There were 15 original companies but one was bought out (Greene King) with a profit of 50%. Six companies were losers and nine were winners. The worst loss was 36% and the best win was 70%.

The end result was a net profit of 15.5% over 7 months (about 26% annual return against an FTSE All Share return of 6%). Results exclude costs and dividends. There was a 1% probability that these results could have arisen by chance.

There is no guarantee that this set of results is reproducible, and I wouldn't presume to recommend any criteria on the basis of a single trial, but my conclusion is that low debt, positive momentum and high quality should produce superior results.

gus 1065

Hi Tim.

Slightly outside the box, but as an amateur share, fund and ETF investor for over thirty years that has made plenty of mistakes, can I suggest one of the best investments would be to spend some time understanding yourself rather than the markets? Both in terms of what your own personal goals, time horizons, risk appetites etc., are and also try and learn how to act rationally rather than emotionally when you have real money at stake (easy to say, harder to do).

Ed often talks of the “monkey brain” biases of many PI’s and the impact this has on their investment performance. In simple terms, the innate human instincts that have kept us alive in the wild for 2 million years or so tend to make us lousy investors and that we need to train ourselves into good behaviours rather than assume good investment habits will come naturally.

With 20:20 hindsight, I definitely would have benefitted from a bit of self analysis at the outset to identify common behavioural tics and avoid making expensive mistakes. Plenty of literature on the subject, but one of my favourites is “The Laws of Wealth” by Dr Daniel Crosby. Nice, light, concise read and a book I often re-visit when tempted to do something stupid or when rattled by the latest crisis or appearance of the “next big thing” to keep me on the straight and narrow.

Gus.

Metatron

Everyone picks winners and losers.In retrospect I wish I asked myself more if I would hold a share for 10 years if I am going to buy it.After that key question is if a share falls do you operate a stop loss or do you average down and buy more?

Investor & Trader

Hi Tim,

Can I recommend my channel:-

https://www.youtube.com/channel/UC3z9dDPBBClk-9IJJlXuMQg

Thanks

Anthony127

10th Feb '20

Tim

One approach would be to read up on the investing styles of the great investors and see whether you find their styles appealing and suited to your temperament. It should also be very educational.

A useful book in this respect could be The Great Investors by Glen Arnold. On first reading this book a few years ago I felt my style and temperament was most akin to that of John Neff who is a noted contrarian but as time has evolved I am moving partly in the direction of Charley Munger's philosophy of buying quality companies and holding for the longer term.

Good luck and I hope you enjoy the process.

What style suits me?

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Timthegambler21

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