A question (from a beginner) about maintaining a portfolio

d712

In various books Jim Slater has listed several methods for selecting shares meeting specific criteria that have performed extremely well over a number of years.

The portfolio that interested me the most involved 5 of UK’s largest companies.

Slater outlines the criteria for selecting the shares. After a year the situation is reviewed and if there are different shares that meet the criteria then these would need to replace the original shares.

This portfolio has performed very impressively and produced an average return of 20% every year from 1984 to 1998. An initial £1000 investment would be worth

- over £17000 after 15 years
- nearly £300000 after 30 years
- and a whopping £5.1 million after 45 years.

Obviously the chances of this type of return are unlikely but it is nevertheless an attractive idea.

However the one question I have is to do with the yearly replacement of shares. I briefly looked into this several months ago and it seemed that most share dealers will charge you a flat fee (from my research at least £12) for each transaction.

If I were to invest £2000 in buying shares this way with £400 invested in each of the 5 companies I would have to pay fees of £60 or more. Then at the end of the year (if all 5 shares no longer met the criteria) I would have to pay additional fees to sell the shares (another £60) and to buy new shares (another £60)

Is there anyway of avoiding this because it seems that a large proportion of the profits will be eaten up in annual fees.

I suppose one solution would be to make larger investment as the fees are fixed but that my take beyond the amount I am willing to put on the line.

Are the figures I quoted for the fees reasonable or are there better deals out there than that?

Any suggestions would be greatly appreciated.

Many thanks

dunstonh

The portfolio that interested me the most involved 5 of UK’s largest companies.

Is that the 5 biggest companies today or the 5 biggest back in 1984? The 3rd biggest back then was GEC, later to become Marconi. Lost your lot virtually on that one.

crossleydd42

Jim Slater merely quoted the well-known O'Higgins System. O'Higgins was an American. Modified for the UK market, take the 10 highest-yielding shares in the FTSE100. Then, of these, pick the five with the lowest market capitalisation (not share price), buy them and, after 12 months, repeat and change the shares as necessary. If you want to try this, use Hoddless, Brennan where a share deal is just £7. It's online share dealing

http://www.hoodlessbrennan.com/ManagedPage.aspx?id=19&context=19:29



Good luck!

Deemy

d712 wrote:

If I were to invest £2000 in buying shares this way with £400 invested in each of the 5 companies I would have to pay fees of £60 or more. Then at the end of the year (if all 5 shares no longer met the criteria) I would have to pay additional fees to sell the shares (another £60) and to buy new shares (another £60)


Many thanks

Yeh your capital would be gobbled up by commissions.

£400 per stock is too little, so maybe 3 stocks at £700 each ?

There are so many systems, and variations on stock selection and liquidation.

But the basic two rules have stood the test of time - namely - cut your losses, and let your profits run.

What I look for is a good trend,

Whats a good trend ?

Well BTEM, an IT trust shows virtually the perfect example of the chart pattern that I look for.... smoothed as a babys bum

http://mwprices.ft.com/custom/ft-com/interactivecharting.asp?pageNum=&company=NEW&industry=&region=&extelID=&isin=&ftep=&sedol=&FTSite=FTCOM&symb=BTEM&countrycode=uk&t=e&s2=uk&q=BTEM&osymb=BTEM&ocountrycode=au&expanded=true&subtab=1&colMode=&time=4yr&freq=1dy&chartsize=4&compidx=aaaaa%3A0&indName=aaaaa%7E0&ma=0&maval=20&type=2&comp1=&comp2=&comp3=&uf=4096&lf=4&lf2=512&lf3=16777216


A stock that also matches the pattern is BHP (though stock trends always are rougher than IT trusts )

http://mwprices.ft.com/custom/ft-com/interactivecharting.asp?pageNum=&company=NEW&industry=&region=&extelID=&isin=&ftep=&sedol=0133508&FTSite=FTCOM&symb=BLT&countrycode=uk&t=e&s2=uk&q=BLT&osymb=BTEM&ocountrycode=uk&expanded=true&subtab=1&colMode=&time=4yr&freq=1dy&chartsize=4&compidx=aaaaa%3A0&indName=aaaaa%7E0&ma=0&maval=20&type=2&comp1=&comp2=&comp3=&uf=4096&lf=4&lf2=512&lf3=16777216


There are many out there, just remember your buying the trend .. Not how far its come

Throw in the MACD for timing purposes and its pretty straightforward to hold, take profits or accumulate.

A few mins work a week at most.

d712

Thanks Deemy

I'll have a look at the links you posted. Whats MACD?

I'm new to all this and still unfamiliar with most terms.

A quick google search produced Moving Average Convergence/Divergence but it seems quite an involved thing. Can it be explained in layman's terms?

Thanks

d712

crossleydd42 wrote:

The modification that I read was a little different.

You take the 30 largest UK companies and then select the 10 highest yielding shares from those. From the remaining ten you choose the 5 with the lowest share prices.

This is the one that gave an average return of 20.9% per year from 1984 to 1998.

I'll have a look at hoodlessbrennan. Thanks :-)

d712

dunstonh wrote:

Is that the 5 biggest companies today or the 5 biggest back in 1984? The 3rd biggest back then was GEC, later to become Marconi. Lost your lot virtually on that one.
_________________________________________________

You wouldn't keep the same shares, it would have to be reviewed every 12 months and you would only keep the shares if they still met the original criteria.

d712

Deemy wrote:

But the basic two rules have stood the test of time - namely - cut your losses, and let your profits run.
_____________________________________________________

Hi Deemy

I'm not entirely sure what that means :-S. Sorry I really am a beginner to this.

At the end of July I noted the share prices of the 5 companies that met the given criteria. They were BT, Lloyds TSB, National Grid, Barclays and Avia.

Since then (roughly 7 months) BT's share price has dropped by 6% whereas the others have all increased by between 10 and 16%. This has produced an overall increase of just under 12%.

I think it would be an idea to go for 3 companies rather than 5 as this would reduce commission but on the other hand you are relying more on the individual companies...

Why can't this be straightforward? lol

crossleydd42

What Deemy means is: don't be slow in selling any shares that are not doing well/price is sliding. Hang on to shares which are doing well/price is rising.
Sound advice (although you'd be amazed at the number of investors who hang onto a dud hoping that it will come good again) although this would not apply to the O'Higgins Method which is more rigid.

BTW The way I mentioned above IS the O''Higgins Method, but there are variations.

d712

Thanks for clearing that up for me.

I wasn't saying that the method you quoted was wrong, I'm just saying mine the one I read was different :-)

cheerfulcat

Hello, d712,

What you are describing is a form of mechanical investing. You might like to have a look at the boards here -

Beginners
Advanced
Tools

In general I think that mechanical investing only works under certain circumstances. You might also like to discuss strategies here

Investment strategies

Fees are unavoidable if you are buying and selling. The Halifax Sharebuilder lets you purchase shares for £1.50 and sell for £11.95 but the purchases are pooled and only done on certain days; I don't know whether that would suit your method or not but here's the link -

Sharebuilder

Finally, this is a very telling statement

This portfolio has performed very impressively and produced an average return of 20% every year from 1984 to 1998.

That's one fifteen year period. What happens the rest of the time?

HTH

Cheerfulcat