Beginners Share Dealing / Beginners Share Trading Think bubble

Is the basic truth that everybody knows wrong, should shares be bought for the medium or long term?

What surprised me is that the answer is far from obviously yes for a typical private investor.
WARNING - CFDs And New Traders
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If you are new to share trading and are signing up for a new account, a quick word of warning.

It appears that a number of people are signing up for CFDs thinking that they are buying shares or commodities.

CFDs are sophisticated tools for the expert investor and if used by accident it is likely that they will incur significant unexpected losses in a period of a day or so.

If you are lucky they will produce unexpected profits in a period of a day or so.

Differences Between Retail And Professional Investors

The internet is full of information on share trading and when I started I took a lot of it to heart.

After trading for a while I began to question a lot of what I was reading as it sounded sensible but did not relate to the reality that I was seeing.

So I created this web site as a place to publish my experiences and the views that I have formed as a private individual actually buying and selling shares with my own money.

Some of the pages may appear odd as they address issues that may not even appear to be an issue to people new to share trading, these may be the most valuable pages.

Having traded since the early 2000's I hope that this site is at least thought provoking even if you disagree with it.

Since then the two biggest issues that I found with the information readily available were
  • Most of the information seems to relate to trading by professional fund managers who have much more money to invest than I have and for a much longer timescale, they can regard 20 years as the blink of the eye.

  • Almost none of the information that is more relevant to the private investor is backed up by the author having used their own money to do whatever it was they were recommending.

    A typical example would be an article such as 3 reasons I’d buy Aston Martin shares despite its latest news which ends with ...neither the author or the publisher have a position in the shares mentioned.
One of the reasons for the dearth of relevant information is surprisingly obvious, before on-line share dealing there were very few private share traders. So there has only been a short period of time for anyone to gain and publish their experience.

Pre about the year 2000 there were dentists, solicitors, headmasters etc with shares but they were bought via brokers, generally taking the broker's advice on what to buy and then holding those shares until they retired.

Once you get to the point of investing your own money what is really telling about the advice and services available is that I have yet to see a financial advisor or wealth management company offer to reimburse some or all of your losses.

Clearly there would need to be caveats on any such guarantee but why are there no such offers?

This is of course a rhetorical question.

Is this because the "Golden Rules" that everyone knows even before they start trading may not actually be true;
  • Shares should be bought for the medium or long term.

  • Shares should not be bought for the short term.
If this were so clearly true then it should be possible to offer the above guarantee.

This view is very seriously questioned within the Short Term Holding section of this site and it is my personal opinion that it may be inappropriate for the typical private investor.

I still regard myself as inexperienced, so there may be useful information here for people who have been trading for a while as well!

Although there isn't an open forum, as I have yet to see a forum that doesn't descend into name calling, poorly thought out posts and blatant lies, there is a feedback section for posting serious comments or questions.


Should I Hold Shares For The Long Term - Barclays, A "Safe" And "Obvious" Long Term Hold.

Everybody knows that shares should be held for the long term.

I read an article recently written for the retail investor that discussed the growth that you would of obtained if you had invested in companies in the S&P 500 index in 1927 until now. This article was completely serious and it totally discounts the fact that most private investors don't invest for 90 years.

Most private investors usually have enough money to start buying shares in their late 30s or early 40s and have to stop at retirement at 65 or possibly 55 in many jobs.

Phrased another way private investors have a 25 year time frame from their first to last investment.

An example of why I question long term holding is Barclays bank.

The chart below shows what would have happened if you had bought £5k worth of Barclays shares in 2002 and used the dividends to buy more Barclays shares.

Over this period, 17 years, you would have received nearly £3k worth of dividends giving a total investment of £8k and the current value would be around £2.5k or a £5.5k loss.

Normally when I share this graph I am told that I have picked a special case, but ask most people if banks are a safe share and most would say yes and 17 years is a long time.

Dividend Graph

Don't forget that had you always withdrawn your dividends as cash then the current valuation would be lower than the chart shows as you would have fewer shares. The value of the initial £5k invested would also have had 17 years of depreciation.

There are more details on the numbers here.

It is worth noting that there is no point between late 2007 and now where you could have sold up and not made a loss.

If retirement meant that you had to sell during the COVID-19 crisis when the share price was 100p you would have lost about £6.25k of your investment or at its worse of 70p about £6.8k.


Holding Shares For The Short Term Or Timing The Market.

Timing The Market is a phrases often used to describe trying to buy shares at a low price and sell them at a higher price over the short term.

It is often used in a quite derogatory way in the same way as Multi Level Marketing/Network Marketing is used to dismiss a business.

There is good reason to be dismissive of the idea especially if you are a professional investor who rarely makes trades of under a couple of hundred thousand pounds and your usual investment is a few million pounds.


Dividend Graph

But what about the private investor who sees an opportunity in a company where there is a limited number of shares available, too few to interest the professional?

Professional investors will also have policies and procedures that say that even if they want to invest in a company they can't, the dividend is too small, the market cap is too low, they can't invest in that market sector.

The professionals may even agree with you but they still can't buy because they are already invested in that company and buying more would unbalance their portfolio.

This distinction between a professional fund manager and a private investor leads to the whole Short Term Holding section on this site, disbelieve in this difference and you will miss the point of that section.

Why Timing The Market is so often dangerous is the chart above covers 90 days in the decline of Aston Martin.


Buy High, Sell Low, Sounds Daft But It Is Easy To Do.

Although it sounds obvious what you should not do is buy shares at their highest price and sell at their lowest.

I mention this because it is what a lot of private investors do.

The first reason for this is simply a lack of nerve, they thought they were long term holders but as soon as the share price drops they sell "to protect themselves against further losses".

They may even try and justify this to themselves and others as a sign of being a sophisticated investor, they accept that they will make losses as well as profits.

The second reason is much trickier to criticise, they are selling because there is a great opportunity elsewhere that will more than recover the losses of selling the current investment.

This is an easy to understand and a reasonable reason, the danger is that the new share doesn't replace the losses and another better investment comes along and another until there is no more capital left.


 

Thought For The Day - PurpleBricks Group plc:PurpleBricks – Not As Good As I Had Hoped.

As an estate agent with a year end of 30 April I was hoping for more, possibly too quickly, as we see the end of a disastrous foray into Canada, The USA and Australia leaving the company only operating in the UK.

The recent sale of the Canadian business for approximately £35m means that in mid July the group had £66m in cash so there doesn’t seem to be a need for a share issue unlike so many others that I have been looking at lately but neither was a profit reported.

UK revenue was down 11% to £80m from £90m which seems reasonable considering COVID but it also implies that 2020 wouldn’t have been showing much growth from 2019, which would be in line with the 6 month trading update earlier.

Despite revenue growth Instructions were down from 69,892 to 53,680 which is 23% for the whole year, but worryingly they were down by 15% for the first 10 months of the year.

Revenue per instruction was up by 12% to £1,394 which made up most of the loss of sales, but PurpleBricks proposition is price and nothing else, every price increase puts them closer to other agents.

Generating revenue from optional services such as accompanied visits is obvious to the customer, commissions from introductions less so.

We also seem to see an inflexibility in the Purplebricks model with £20.6m of marketing costs for the £80.5m revenue which is 25%.

The last two month of the year brought in around £3.3m a month compared to £7.4m per month for the first 10 months of the year but marketing dropped to £0.75m per month from £1.9m per month for the same period.

Both periods have a revenue to marketing ratio pretty close to 4:1, suggesting that people who want to sell probably know about PurpleBricks and just need reminding.

Supporting this argument, in 2019 £26.7m was spent on marketing nearly £6m more than 2020, roughly a 25% reduction in marketing in 2020 saw a reduction in the number of instructions somewhere between 15% and 23%.

There is a lot of uncertainty but it seems that the cost per instruction has been around £350-£400 over the last 2 years.

The company claims a record level of instructions of over 7,000 homes in July which seems positive which would equate to 84,000 over 12 months, but allowing for some sales delayed by house sales being discouraged by COVID and a quieter few months around Christmas sales are looking around the same as this year.

So is the honeymoon period over for Purplebricks? It is not clear why the model failed overseas but seems to be prospering here, overseas the estate agents simply said fine you do what you want, we aren’t changing our prices and customers were happy to pay the higher agent fees.

It may be that overseas agents do more visible or appreciated work in the sales process whereas in the UK the industry is regarded poorly.

At a flat £1k/£1.4k (Outside London/London) there doesn’t seem to be that much room for fee increases and still be massively cheaper in the commodity market.

I’ve just looked on the website and saw this Round the clock support from your dedicated Local Expert. and Here for you 7 days a week, day or night which is PurpleBricks other weakness, overstressing the self employed Local Expert who then can’t deliver the expected level of service.

It is not even necessary, most people would understand an estate agent that says we work midday to 9pm with a messaging service in the morning.

It is a sign of a salesman led company over promising and under delivering.

There was a confusing model of Territory Owner and Local Property Expert which had a bit of MLM ring to it and this was revamped at the start of 2020 and there are far fewer Territory Owners but the LPE still seems to be struggling with the demands placed on him.

As an example I looked at a two bedroom flat, clicked on Street View to be shown the interior of a cookery shop which is presumably below the flat, would you be happy with that as the seller?

The agent is self employed, he needs to get on to head office who probably can’t do much because street view is used on all properties and there isn’t an option to get it to do what is wanted, nobody really owns the problem.

The independent can scream at his web developer and get it fixed or at least not displayed tomorrow.

A lot of the annual report talks about using technology to help delivering greater automation and efficiency but there is the danger of adopting the web standard of “working 90% of the time is good enough.”
This isn’t what people want with a major sale or purchase, they want to speak to someone.

It was disappointing how brief the annual reports was on the financials side.

Looking at the specialist property press there are a number of comments on fora about the lack of industry experience at the top of PurpleBricks and how it was always the plan to create a business and sell up without any long term plan along with how high street agents are brilliant and Purplebricks are terrible.

But the point about service is valid, even if some of the people making it don’t offer it.

For me PurpleBricks are going the wrong way, they need more staff and less automation, people in head office who can credibly act as support for the LPE, so he has to work hard but only reasonably hard.

Although it has dropped out of the news, we have BrExit approaching and who knows what if any deal will appear.

Earlier I thought the group profitability was being dragged down by failed overseas ventures, but while that may be true, it also may be that PurpleBricks is a time expired idea.

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