Rational share strategy

Glastoun

Finding some unexpected money, I took a punt on some Debenhams shares as an introduction to the stock market. I don’t have enough funds to get into shares seriously, because of the fees involved, so this is more for fun and curiosity.

I chose Debenhams because a) they were at a high of 118p at the start of the year; b) on 4th March the price dropped 18% from 95p to 80p on announcement of a profit warning – expected £120m instead of £130m; c) the price stabilized around 82p for a couple of days; and d) I really like their shirts.

If it rises to 88p I make my money back, covering fees. If it rises to 97p I would be up 10%/£50 and would think about selling to take the profit. If it dropped to 75p I would be down 15%/£75 and think about selling to cut losses. I’m not in a rush.

Apart from ‘You shouldn’t have bought Debenhams shares’, does this seem a rational strategy? Or should I hold onto them above/below my price limits?

Actual profits will be announced towards the end of April, what’s the likely effect on the share price if they announce £120m as now expected?

gozomark

so you would sell if you either make 10% or -15%

your stop loss should be a smaller %age change than your profit target, otherwise if you make 2 such decisions and one works and one is stop lossed out you are down.

grey_gym_sock

ignoring your choice of share ...

you've calculated you need c. 7% price rise to break even.

the stock market generally can easily go up or down by that amount in quite a short time, and individual stocks are even more volatile. but a lot of the ups and downs cancel out, and on average 1 might only expect shares to beat cash in a savings account by perhaps 3% a year (there's some debate over the exact figure).

so, suppose you've bought an averagely good share. in that case, your dealing costs will cancel out 2 years' worth of the advantage of holding shares rather than cash. if you hold a share for < 2 years, and it performs averagely, then your costs will more than wipe out that advantage.

of course, you don't usually get anywhere near the average - you usually get vastly over or under it. and this can be due to both choice of share and what the market generally is doing.

basically: costs are very important. and this continues to be the case if you go on to invest more significant amounts, though the arithmetic will be different.

Glastoun

Thanks for these, the lower stop-loss limit makes sense, and costs are why I'm not likely to move into shares any time soon. This is more of an exploration.

Thinking about it, if the choice of share was not a good one, it would be interesting to hear why. I guess I believe/hope it will be back up to 115p by next Christmas, although even if it does I'd probably have bailed by then.

Linton

Glastoun wrote: »

....

Thinking about it, if the choice of share was not a good one, it would be interesting to hear why. I guess I believe/hope it will be back up to 115p by next Christmas, although even if it does I'd probably have bailed by then.

The choice was not a good one in my view as companies in trouble often have a series of profit warnings. You want to invest in companies that you have a soundly based belief have a good future. So the "I like their shirts" reason is probably better than any other you have given.

If you have a belief that they will rise to 115p why sell when your belief is supported by a rise to 97p? Do you have a better home for your money? If so why didnt you invest there in the first place?

As a new small investor it is not a good idea to buy a single share. Any major fall could wipe you out. You would be better advised to choose a fund where your money is spread over possibly hundreds of shares and so minimise the effect of individual companies failing.

As a method of trying out buying and selling investments what you are doing is fine and possibly more educational than just reading books or forums. However it is playing, not serious investing.

gkerr4

agree with Linton - companies reporting profit warnings are in trouble - they aren't going to make what they previously forecast so you need to be convinced they can "turn it around".

The stop losses / targets question - this (in my opinion) is about good financial management - set and hold stop losses, i'd consider 10-12% a good value for getting out and cutting the loss.

As mentioned above though you really need to have higher targets - at least 25-35%+ so that your balance of winners v losers still allows you to have a positive position on the wider portfolio - difficult when you only have one holding, i agree.

Grey Gym sock makes some valid points on costs - and this is a major factor for private investors - those trades at £10 each way + stamp duty + the important point of the spread on the stock soon add up.

out of curiosity - what did you actually 'buy' at and what were your costs? have you factored them into your 'break even' position.

Glastoun

Yep, this is definitely playing (to put it into perspective, I also bought a bottle of port produced in the year that I was born - luckily I'm not as old as I could be...). I also have SIPP/ISA investment funds, started off with a lump sum and also monthly payments, so there's no way I would risk that money on shares.

I guess the higher the share price went, the more nervous I'd be of losing these gains. So if it did reach my initial target of 97p, would it be rational to set another high/low limit, say 105p/94p, or does that way danger lie? 'Just one more bet, it must come up red this time....'

I bought 584 shares at 83.09p, with £12.95 dealing fee and I think £2.50 stamp duty. All costs, including £12.95 selling fee, are factored into the figures on the OP, and were ratified as part of the punt.

I do believe Debenhams can turn it around - their shirts are that good.

IronWolf

I think 10% is far too low to be considering profits, it's just noise really. I look for more like 50-100% before thinking about selling.

I dont think your strategy sounds very rational, why would you sell if the price goes down instead of buy more? If it was a good buy at 88p surely it's an even better buy at 75p?

srcandas

IronWolf wrote: »

I think 10% is far too low to be considering profits, it's just noise really. I look for more like 50-100% before thinking about selling.

I dont think your strategy sounds very rational, why would you sell if the price goes down instead of buy more? If it was a good buy at 88p surely it's an even better buy at 75p?

Yup very true. But OP I think you've made a good investment. Solid retailer with good track record and good management and good shirts (apparently ).

And remember that they pay a divi.

I'd forget stop losses and taking profits and let it run for say 12 months. The worst, and I think very unlikely, is you lose the lot. Monitor it, compare it with other retailers, and keep buying the shirts. And in the meantime save up so you can but another share when one stands out as this one has.

And slowly you will build a portfolio.

I know the temptation when a free £50 is there for the taking but what would you do with it? If you think to buy another share the move (sell/buy) will cost and the odds of the new share being better than a 97p debenhams share is not that great.

Anyway welcome to the share buying world. Enjoy it. And don't take it too seriously

gkerr4

IronWolf wrote: »

I think 10% is far too low to be considering profits, it's just noise really. I look for more like 50-100% before thinking about selling.

I dont think your strategy sounds very rational, why would you sell if the price goes down instead of buy more? If it was a good buy at 88p surely it's an even better buy at 75p?

i just can't agree with this - if the price drops that much, either your research was wrong, or the market changed - either way, you need to revalidate your investment rationale and ask "would i buy this share at 75p" - regardless of the price you previously bought. If the answer is 'yes' then great - but the answer could well be "no, they just announced a profit warning", or the market for that product has dried up or whatever - in which case, you need to cut losses and move on.

Glastoun

Yes, dividends are in there as well - the last dividend was the highest for four or five years, although it will likely be lower next time, and I don't hold enough shares for it to make a huge difference.

Barring any unforeseen incidences, the next 'news' will probably be the actual profit announcement in the middle of April - if this does turn out to be around £120m, which was the 'warning' figure, what is likely to happen to the share price?

* nothing, because it has already been priced in; or

* slight rise, as I've read somewhere that most shares rise around media-circulated profit announcements due to increased trading from amateur investors (i.e. people like me)