Beginners Share Dealing - Short Term Holding

It is certainly true that many companies that survive over the medium and long term have share price increases and may have paid dividends which a lot of people reinvest in the company.

What the medium and long term hold argument ignores are the losses that occur when you are holding shares in a failing or failed business or one that suffers a big share price drop over time.

When should you have sold your shares in Debenhams, House Of Fraser, Carillion, HMV, Patisserie Valerie, Thomas Cook, Yellow Pages, Woolworths, Royal Bank Of Scotland etc, Aston Martin, Metro Bank, NMC Health, Staffline?

Ouch, there are a lot of familiar names in that list, some are still trading but share issues have massively devalued initial investments. Aston Martin and Metro Bank for example are for all practical purposes trading at zero pence for people who bought them in 2018.

One of the more interesting disasters is iEnergizer (IBPO), a successful AIM listed company that decided to delist as they were gaining little from their listing, shares crashed from around 320p to 70p because they would be very difficult to trade.

As you read more and more on the traditional view it becomes clear that just about all of the information is sourced from the experiences of professional fund managers.

Now let's state the obvious, professional fund managers are different from private investors, they run funds that are intended to last for 25, 50 or more years, are worth hundreds of millions of pounds and usually have new money added on a continual basis.

Most private investors will start in their 40s or 50s and will need to stop adding and start withdrawing money from their investments after 15 - 25 years, typically this will be because of retirement or redundancy.

Repeating the point: Most private investors have a fixed date for when they will have no new money to add to their investments and will need to withdraw dividends and capital.

So does buying shares with the intent of holding them for the short term which is the strategy discussed here make sense?

The strategy discussed here is focused on individuals who have roughly £5k to £100k to invest.

If you have a fund of over £100K then you probably already have your own strategy and if you don't then you probably don't want to start by investing all of your money in something new to you.

if your fund is much less that £5k, then the amount of money that you will be gaining using these strategies may be too small for the necessary effort.

• The basic ideas is that you take your investment funds and break them up into pots of around about £2k-£20k, the size and number of pots being dependent upon the total amount available.
  
  
• A good minimum size for a pot is £5k but there is nothing magical or scientific about this, it is like a 30mph speed limit, experience says that it is a good starting point.
  
  
• These pots are then used to purchase shares in a range of solid companies, (FTSE 100, 250 or All Shares but not The AIM) trading at around 30%-50% off from their recent peak price but not "falling knives".
  
  
• Provided that you understand the reason for this drop and believe that it is unreasonable. Sometimes the drop is because the company is in terminal decline and you need to be able to tell the difference.
  
  I am still surprised by the amount of lying, misrepresenting and failing to disclose that goes on and how small, if any, the penalties are.
  
  
• These pots are then sold when they offer a profit in the range of 10%-40%, meaning that you are selling well below their peak prices and hopefully trading each pot 3-6 times per year.
  
  
• Although these profits sound small, taking them means that at the end of the year there has actually been some growth, rather than none whilst waiting for that "big one".
  
  
• The key objective is compound growth, as each investment is slightly larger than the previous one you only need 18 trades, not 25, at 4% to double your original pot.
  
  
• The low profit and high trade frequency aims to avoid the much more frequent than you might expect massive overnight share price drops, 20%-50% drops that wipe out the growth from all the other trades.
  
  
• Having found these companies you sacrifice possible larger long term gains in exchange for exposing yourself to that company for as short a period of time as possible.
  
  
• History is quite clear, at some point in time there will be a big stock market drop and you need to be able to accept a few years of no growth whilst the market recovers. It turns out that COVID 19 was the latest unexpected factor, hitting airlines, luxury and recreational industries very heavily.
  
  
• Because of this short term holding has to be aimed at building a pot for retirement rather than for current income, so it is best suited to those who have a job, another source of regular income or 3-4 years of living expenses as cash.
  
  

If you think this sounds too easy, try it and you will find otherwise.

The work involved in doing this is not trivial, expect to spend about an hours a day on this. This not a get rich quick strategy based on it once worked by luck, it is a disciplined, almost engineering approach.

The objective is to learn enough about all of the companies in at least the FTSE 350 index to be able to have a view without having to do much research when the share price moves.

"Aston Martin are up 30%, great this is the start of a recovery must buy".
or
"Aston Martin are up 30%, who cares they are still on the way down".

If you already have an opinion on the company before you hear the news then you won't need to do much, just check if there is a RNS announcement and possibly an internet search for today's headlines.

Another "everyone knows" is DYOR (Do Your Own Research) when deciding which shares to purchase, it is critical to understand that you can not have a full and complete picture so you will be caught out.

The more general knowledge and time you have the more you will be able to see beyond what you are being told, there were people warning about NMC(NMC) and Finablr(FIN) but not Patisserie Valerie(CAKE)

The costs of buying and selling shares have tumbled especially for execution only services, but as well as the dealing fee most share purchases are subject to Stamp Duty at 0.5% for UK shares. As this is a tiny amount it isn't critical and there is nothing that you can do about it anyway.

Depending on who you use to you buy and sell shares there will be a fee, for straightforward purchases either inside or outside an ISA the fees will typically be a fixed fee between £5 and £25. Share purchases within more complex tax schemes are more likely to be percentage based.

If you invest too little then these fees become a big part of any profit, for example if you decide to test the water with just £100 and pay £10 to buy and £10 to sell you need a 20% growth in the share price just to cover your dealing costs. This is the main reason for my suggestion that the minimum pot size should be £2k

Once you decide to buy a share you need to set a sell price, typically this strategy suggests a value in the region of 110%-140% of the purchase price.

There are exceptions where if the share price is going to recover at all it will be close to double, double, or even more than that. Amigo Loans is an example of this, this long term disaster is continuing and the shares now look like being worth nothing or 10 times their current price of 8p.

However these are rare cases, usually the price is low for a good reason.

By taking a small profit you are able to trade frequently as 10%-25% profits are frequently available and once you have sold you have slightly more for the next trade. In some cases looking for a bit more than 25% can make sense but you need to exercise caution and for me 40% is usually the upper limit.

You can always find an exception, especially with hindsight, Indivior (Apr 2019, INDV) could have almost doubled your money in one day if you bought and sold at the right time, but you could also have been holding a share that was suspended and eventually lost all of you money.

Compound growth is central to this strategy and once you get into the idea you may become a convert.

It is important to actually sell otherwise you just have a paper profit that may disappear.

Taking a 10%-49% profit may seem to be lacking nerve or even overtrading but 40%-100% profits are rare and usually require either a very long term commitment with its attended risks of a 100% loss or trading in risky companies.

Two 10% profits within a couple of months are better than 0% because you were holding out for 25% before selling.

If a share is not returning a profit then at some point you must accept that you were wrong and accept a loss. If you don't you may end up with a 100% loss, but more likely you will just have a pot that is not growing.

Be careful about getting too blaze in accepting losses though, think hard when you make a loss, are you repeating a mistake?

It is reasonable to keep that company under review and rebuy at a later date.

You may find that you are frequently trading the same small group of companies as their price oscillates around a semi fixed point. When this is the case you need to frequently refresh your understanding of the companies involved.

I was holding Woolworths on the day it was wound up because I couldn’t believe that it would close just before Christmas.

Whilst no one can predict when the next big share price crash will occur, when company x will announce unexpected bad news or when a currency will change value massively, everyone who is investing money should be able to predict that it is likely to happen at some time.

The basics of short term holding is to find solid companies, those whose business you understand and believe to be profitable now and in the future but whose share price is out of favour mainly as a result of overreaction to bad news but sometimes for "fashion" reasons.

However many of these companies also see further drops as a result of overreaction. Some of the overreaction portion of the drop is often recovered over the next few months and the new price becomes stable possibly leaving long term holders with a capital loss of 20%-40% for years or even for ever.

Before jumping in and as far as is possible you need to understand why that company has dropped as often the market is right and new price is the right price.

In many cases the drop isn't caused totally be the actual facts revealed but by what they suggest might happen. For example around the start of 2020 Lookers (LOOK) a multi-franchise new car dealer announced a possible fraud of around £4m, by July it had gone up to around £19m and the shares were suspended as the 2019 accounts had not yet been finished.

This type of share is often called a Value Trap, these are companies whose shares you think are a bargain but the share price stays low for a long time and possibly drifts lower, the market knew more than you.

Clearly you can never entirely protect yourself from holding a share the day that the bad news is announced, but most investment strategies don't even attempt this.

I suspect this is because they are in denial about the level of knowledge that the investor has about a company.

The private investor has one very a big advantage over the professional investor and this shouldn't be under-stated.

Imagine a share in a company that has low trade volumes and is undervalued by 60% but the typical trade volume is only £100,000 per day.

Buying more than this will be possible but it will massively affect the price, this situation is more real than you might imagine.

A professional managing a large fund and needing to invest £50 million this month will have no experience or interest in trading this type of share as the total available investment is too small for him.

Yet for the private investor for whom a £10,000 purchase would be a significant portion of their total investment this could be a great buy.

There is a profitable market that the professional is effectively excluded from simply because the absolute profit available is too small.

These companies are not questionable start-ups on the AIM, they can be FTSE 250 or All Share companies.

The really nice thing is that rock solid FTSE 100 companies are also available to the private investor, so it's a win win. The professional investor is excluded from smaller opportunities but the private investor is not excluded from the bigger ones.

Whilst the rationale behind short term holding might suggest that CFDs could be used I am of the opinion that using such products is outside of my abilities.

If you are being truly honest with yourself it is highly likely that they are outside of your abilities too.

I understand the desire to try products that offer leverage (trading on credit) as they offer much greater potential profits. If you try them and the first few trades are a success then the temptation to continue to use them could be overwhelming.

Unfortunately the reality seems to be most people incurring big losses, so much so that even the financial regulators around the world have started to step in.

The last time I checked a CFD provider, the warning said 76.4% of retail investor accounts lose money when trading CFDs with this provider.

Remember those people who were gambling on currency and got hammered in Jan 2015 when the Swiss Franc was revalued significantly?

Loads of small traders started crying that they had lost more than they could afford and it wasn't their fault.

It is important to stress that short term holding is not the same as day trading, where shares are bought and sold on the same day.

Day Trading originated in the USA where they have no stamp duty so no need to cover the UK's 0.5% stamp duty and even then most people who try it lose.