Investment - Can We Beat the Experts?

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This page has still to be developed. For the moment, just a few notes on the sort of thing I am thinking of including, plus a few useful links at the end. The content will evolve gradually as I find time to do it, and eventually I will decide there is enough of it to justify removing this initial note.

This page is for amateurs who want to do their own thing and so avoid all the horrendous management fees charged by unit trusts, investment trusts and financial advisors (to use the British terms - most advanced countries have equivalents under different names). They almost all share two characteristics: They charge more than they are worth, and they under-perform the general stock market.

It does not follow, however, that nobody should use them. If you cannot invest enough to spread your investment over at least eight to ten companies and market sectors (bearing in mind it is not worthwhile to invest less than a certain amount in any one company because of the dealing overhead costs), then there is no sensible alternative to using either unit trusts or investment trusts as a means of spreading the risk - which is essential - and still benefit from the long term growth of the stock market. They also provide a much easier and safer way of investing in foreign companies than direct share buying (which in some cases is not even possible).

What this page will most definitely not be is a tip sheet recommending purchase or sale of particular shares, but I may well include some general comments on the "benefits" of such services.

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This page will discuss methods of analysing share/stock performance, methods of selecting what to buy, methods of deciding when to sell and methods of predicting when/if the next crash will come.

If my available web space has room, I will also discuss the advantages and disadvantages for UK based investors of using building societies, banks, various bonds, preference shares, gilts, National Savings, TESSAs, PEPs, ISAs nominee accounts with stockbrokers and the various types of stockbroker services available to the typical small shareholder. Examples will probably be included of particular cases. The impact on UK investors of the new CREST system of dealing will also get a mention. I may also find room for some discussion of personal pension plans and their providers.

Links will be included to sources of software and data, and to newsgroups and listservs when I find some worth using (I haven't seriously started searching yet).

Buying and selling shares in companies

There are two main reasons for the small investor to buy shares in a company. One is in order to receive a regular flow of dividends, which can by and large be expected to keep up with inflation and possibly provide a little capital growth as well. The other is in the hope of major capital growth. The former is relatively straightforward, but not, of course entirely risk free. The latter is much more difficult to get right but offers the possibility of achieving real riches over a reasonable period of years (or even months with unusual good luck/judgement). It is therefore to the latter problem that I shall be devoting most of my attention.

Data sources

I don't know what the position is in other countries, but until very recently it was not possible in Britain to get stock market prices, etc. on-line at a reasonable price for the amateur. Even now, I have not found a way of getting them in a form suitable for mass processing.

When the Financial Times announced their web site with stock market prices available, I envisaged being able to download a file carrying all the prices as listed on their back pages of the newspaper, which would have been ideal. Unfortunately, they have reformatted the data so you can only download data for one company at a time - lots of data for the selected company, so very useful for analysis at that level, but useless for the initial selection of companies.

As a direct result of this problem, my testing of certain theories I have developed or half-developed is severely restricted by the data entry problem. I had hoped I might get round this by use of OCR on the newspaper pages, but either the package I have (Omnipage, supposed to be one of the best available) or my knowledge of how to use it has so far proved totally inadequate for this task. The conclusions which follow, therefore, are based on less analysis than I would like, and are therefore to some extent tentative.

The stages in share dealing

The major stages, which I shall deal with one at a time, are:
  1. Which shares to buy
  2. How many to buy
  3. When to buy them
  4. When to sell them
  5. How many to sell

Selecting companies to buy shares in

The biggest capital growth rates are usually to be found in very small companies. A very small company can multiply its turnover tenfold (and sometimes its profit more than that in the process), while still taking a negligible share of the market for its goods or services. A blue chip company simply does not have the scope for that kind of growth, because it already has a substantial share of the market and would only achieve limited growth even if it captured all the remainder. Numerous tip sheets specialising in "penny shares" rely on these facts to persuade small investors to rely on them and invest in small companies. They do not make crystal clear the other fact that far more small companies go to the wall, or achieve negligible growth, with only a tiny minority of them showing the spectacular gains that make the headlines on the newspaper financial pages. Nor do they draw attention to the fact that the shares in a small company can be difficult to sell, especially if the company is not doing well, nor that the dealing cost of selling is greater than with a well known company. I believe firmly that investment in small companies is too risky for the small private investor, and is only suitable for the more marginal "risk" funds of those who have their main investments somewhere much safer.

The other end of the range is to invest solely in blue chip companies. While no stock market investment can ever be 100% safe, this is as safe as you can get. However, these are the very companies with least opportunity for major growth rates, and also those most closely monitored by the professionals with unofficial contacts. Inevitably, the small investor will be the last to know when something significant is happening which affects the share price, so he is most likely to lose out both on buying when prices are likely to rise and in selling when they are likely to fall, because the main price movement will have happened before he knows anything is happening. While it may be sensible, therefore, to have a part of the portfolio in blue chips, this is not the place to look for major capital gains.

This leaves the middle section of medium size companies to look at. These companies are small enough for top management to be fully in touch with everyday operations (impossible in a major corporation), yet big enough to make total and sudden failure very unlikely. Further, these companies will not be getting the attention from the professionals that will be afforded to the big boys, so there is a better chance of getting in at the beginning of a new trend, before the major price movements have happened.

There remains the considerable problem of how to select companies from among this large middle range.

(To be continued)

Two links for UK company data are:
Financial Times, which includes up to date share prices, and
Hemmington Scott Publishing Limited

A commercial link for software/books on technical analysis (not tried) is:
Updata Software of London. They also supply a program to enable you to experiment by "playing the market" with realistic data, but no real transactions, making it easy to try out your theories.


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This page last updated 17th September 1997