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FINANCIAL CHRONICLE™ » EXPERT CHRONICLE™ » Read this if your stock-market results are disappointing.

Read this if your stock-market results are disappointing.

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sriranga


Co-Admin
Published in Investing on 19 August 2011 by Kevin Godbold

I'm reading a great book that is making me think about how I've been managing my share portfolio, even after several years of stock-market investing.
It's called "Selecting Shares That Perform" and was written by Richard Koch and Leo Gough, one a successful investor and the other a prolific author of financial and investment books.
Some of their rules for portfolio management challenge my previously held views, but I think they make sense. The following list starts with the rules that are rocking me the most:
1. Never 'average down' when the price is falling
They must be joking, right. Never average down; surely that flies in the face of conventional wisdom. Heck, I've averaged down on my investments loads of times, when they've moved against me.
But here's the thing -- although times of general market weakness may be a good time for bargain hunting, maybe there's a rational argument for not averaging down when an individual investment tanks. What we are talking about here are shares that fall despite being part of a rising index or portfolio. After all, we buy shares in companies because our analysis leads us to think that they will go up. If they go down, we were wrong, plain and simple.
Averaging down means we think a share is about to turn around and go up again, right? Well that's a tough call to make and one that's easy to get wrong. If you don't believe me, look at shares such as Royal Bank of Scotland (LSE: RBS), Lloyds Banking (LSE: LLOY) and Taylor Wimpey (LSE: TW), all popular 'value' favourites around 2007. Look at the share prices of these companies now and think of those investors that averaged down into the share-price destruction.
To me, it seems wise either to maintain our original weightings in such bad performing investments, or even to consider using the next rule:
2. Never be afraid to sell at a loss
Instead of averaging down, why not axe a falling share? I mean, it's doing the exact opposite to what it was 'supposed' to do, so why not just cut and run after a predetermined decline? The book I'm reading suggests 7-10%.
I wish I'd done that much more often. Shares such as Trinity Mirror (LSE: TNI), Dixons (LSE: DXNS) and HMV (LSE: HMV) could have been prevented from causing so much private-investor carnage if those punters had simply sold on share-price weakness.
3. Balance patience and prudence
Whether we fall into the 'long-term buy and hold' camp or the 'it's never wrong to take a profit' camp, it's a good idea to seek a balance between the two philosophies.
How patient should we be? If we are holding a share for years, and nothing happens, maybe it would be more prudent to sell and move on to other opportunities. Similarly, if a share rockets very quickly, maybe it's prudent to pocket some of those gains. My own rule-of-thumb is 'the faster the gain, the faster the sale.'
Generally, I think it's wise to be flexible and not become too entrenched in either philosophy.
4 Do not over-diversify your portfolio
Traditionally, a diversified portfolio of shares is seen as a defence against individual company risk, but too many shares in a portfolio can actually increase risk.
With too many shares, it's hard to know the underlying companies that well. There is a risk that the quality of your choices might decline and, with so many holdings, you could end up chucking in a few speculative punts with hardly any thought.
With greater focus on just a few shares, it's more likely that we will be on the ball when it comes to buying and selling. The book suggests that between five and ten shares is adequate for most investors.
5. Do not invest heavily when everyone else is
You've probably heard the adage: "When they are crying, it's time for buying; when they are yelling, it's time for selling."
In other words, when everyone has gone share crazy, there's a good chance that markets may be close to a cyclical high -- often a disastrous time to buy most shares.
Conversely, when markets have plummeted and shares are very unpopular due to recent investor losses, it is usually a good time to pick up cheap shares on depressed valuations.
6. Only invest if you are confident in the company's prospects
The book cautions: "Investing in the stock market is not like picking a winner at Aintree", and we can only be confident in a company's prospects if we have researched and analysed it thoroughly.
If we invest in speculative companies with no profits, but with great 'potential,' it is usually very similar to betting on the horses with an unpredictable outcome. On the other hand, finding attractively valued, profit-making businesses with good growth prospects can help us to achieve results that are more predictable.
Bottom Line
To me, these are sensible rules and I'm looking forward particularly to applying the first two more with my own share portfolio.
www.fool.co.uk



Last edited by sriranga on Fri Mar 09, 2012 9:30 pm; edited 1 time in total

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Thanks very useful post.

Excellent post mate! Thanks a lot for the share!!!!

Sriranga,

As an experienced person like U, sharing valuable ideas, is a asset to this forum.Tks.

Appriciate your knowledge sharing...

~ Gee Thanks a lot yes I too did that averaging mistake. We should average only at the right time otherwise it will end up with extra loss. If we cut off at the losing point by exiting, it will be less harmful than when U exit at a loss after averaging.

Thanks a lot for the valuable advice. For me I'm learning the lessons through the experience and valuable posts like this. but there may be few that does the same mistake again. I invite them to read these valuable posts and turn the losses into profits. ~

Really usefull post!Very Happy
Thanx bro.

whats wrong with averaging down a blue chip which is down with the index ( beta 1) ?

@hirankb wrote:whats wrong with averaging down a blue chip which is down with the index ( beta 1) ?

I prefer to average by the following way, please read this link.
http://forum.srilankaequity.com/t6611-averaging-the-buy-price-to-minimize-risk-a-common-mistake-of-stock-traders#77319

rijayasooriya

Post Tue Oct 18, 2011 7:40 pm by rijayasooriya

@hirankb wrote:whats wrong with averaging down a blue chip which is down with the index ( beta 1) ?
What I am going to tell below is easy to tell but difficult to follow.
Averaging,cutting losses and just holding are different strategies and all will work depend upon the condition or situation.Therefore u have to select the suitable stratergy for the current situation.

Mr Sriranga, You hit the nail of the head..... what the hell have I being thinking ...... this is a text book answer that almost everyone mis interpret.. Thanks for head slap.

by the way I see a head and shoulder top reversal pattern developed in ASI. Am i correct...?

Awesome... Thanks man....

Kinm hunter

Post Wed Oct 19, 2011 10:04 pm by Kinm hunter

Grate ...

Cheers.....

avatar

Post Thu Oct 20, 2011 11:52 am by snowball5

Thanks for sharing with us.

Timely reminder.
On of the very good one shared by you.
Keep it up.

avatar

Post Sun Jan 15, 2012 4:08 pm by Light of Hope

why didn't I read these things all this time

bakapandithaya

Post Sun Jan 15, 2012 6:17 pm by bakapandithaya

Thnkx sri 4 shring

K.Haputantri

Post Thu Feb 02, 2012 2:31 pm by K.Haputantri

Thanks Shri. Good one.

Again one of the best article shared by you.
I wonder how you are spending much time on reading?
Anyway thanks a lot.

@hirankb wrote:Mr Sriranga, You hit the nail of the head..... what the hell have I being thinking ...... this is a text book answer that almost everyone mis interpret.. Thanks for head slap.

by the way I see a head and shoulder top reversal pattern developed in ASI. Am i correct...?

I agree with you.
Good one to share.
We readers need to read the following website,www.fool.co.uk-where sriranga is getting more info and sharing with us.

avatar

Post Tue May 07, 2013 10:22 pm by madhawa.h

5. Do not invest heavily when everyone else is
You've probably heard the adage: "When they are crying, it's time for buying; when they are yelling, it's time for selling."
In other words, when everyone has gone share crazy, there's a good chance that markets may be close to a cyclical high -- often a disastrous time to buy most shares.
Conversely, when markets have plummeted and shares are very unpopular due to recent investor losses, it is usually a good time to pick up cheap shares on depressed valuations.

Hiks. This is what none of the ppl do. bt a best practice. Smile we all do the other way around. Smile

Averaging works if the share is very liquid or a value share or both. SAMP dropped from 300 to 148 in two years back at 230. The drop was not because there was anything wrong with SAMP, so if it was good to buy at 280 why was is it not good to buy at a 50% discount? Unless one has run out of money, and buying on credit, averaging will not work.

Read this if your stock-market results are disappointing.
Post by sriranga on Mon Aug 22, 2011 6:39 pm
First topic message reminder :
Published in Investing on 19 August 2011 by Kevin Godbold


This is how I get it........... Thx SRI!

1. Never 'average down' when the price is falling
When they go down....... sell and catch from bottom

2. Never be afraid to sell at a loss
Instead of averaging down...... sell and catch it from bottom... so we can save or limit the invested amount for the same quantity..

3. Balance patience and prudence
Slow moving shares - better to sell and move on to other opportunities.
Fast moving shares - pocket some of those gains


4 Do not over-diversify your portfolio
Portfolio - better to have between five and ten shares

5. Do not invest heavily when everyone else is
"When they are crying, it's time for buying; when they are yelling, it's time for selling."

6. Only invest if you are confident in the company's prospects
Research and analyses your preferred companies thoroughly.
Speculative companies with no profits, but with great 'potential,'
Attractively valued, profit-making, good growth prospects - predictable result.


www.fool.co.uk
Last edited by sriranga on Fri Mar 09, 2012 9:30 pm; edited 1 time in total

Thank you SRIRANGA.....!!! this is good input of our learning process.....!!! cheers



Last edited by KDDND on Fri May 17, 2013 9:03 pm; edited 1 time in total (Reason for editing : English improvements!)

Game is different during bear and bull.

Sometime one can sell too early in a bull ;-)

Best to know your investment value, period and the market you are in.

If everyone becomes a trader there will be no CSE. Like wise the other way around for investors.





@KDDND wrote:Read this if your stock-market results are disappointing.
Post by sriranga on Mon Aug 22, 2011 6:39 pm
First topic message reminder :
Published in Investing on 19 August 2011 by Kevin Godbold


This is how I get it........... Thx SRI!

1. Never 'average down' when the price is falling
When they go down....... sell and catch from bottom

2. Never be afraid to sell at a loss
Instead of averaging down...... sell and catch it from bottom... so we can save or limit the invested amount for the same quantity..

3. Balance patience and prudence
Slow moving shares - better to sell and move on to other opportunities.
Fast moving shares - pocket some of those gains


4 Do not over-diversify your portfolio
Portfolio - better to have between five and ten shares

5. Do not invest heavily when everyone else is
"When they are crying, it's time for buying; when they are yelling, it's time for selling."

6. Only invest if you are confident in the company's prospects
Research and analyses your preferred companies thoroughly.
Speculative companies with no profits, but with great 'potential,'
Attractively valued, profit-making, good growth prospects - predictable result.


www.fool.co.uk
Last edited by sriranga on Fri Mar 09, 2012 9:30 pm; edited 1 time in total

Thank you SRIRANGA.....!!! this is good input of our learning process.....!!! cheers

@slstock wrote:Game is different during bear and bull.

Sometime one can sell too early in a bull ;-)

Best to know your investment value, period and the market you are in.

If everyone becomes a trader there will be no CSE. Like wise the other way around for investors.





@KDDND wrote:Read this if your stock-market results are disappointing.
Post by sriranga on Mon Aug 22, 2011 6:39 pm
First topic message reminder :
Published in Investing on 19 August 2011 by Kevin Godbold


This is how I get it........... Thx SRI!

1. Never 'average down' when the price is falling
When they go down....... sell and catch from bottom

2. Never be afraid to sell at a loss
Instead of averaging down...... sell and catch it from bottom... so we can save or limit the invested amount for the same quantity..

3. Balance patience and prudence
Slow moving shares - better to sell and move on to other opportunities.
Fast moving shares - pocket some of those gains


4 Do not over-diversify your portfolio
Portfolio - better to have between five and ten shares

5. Do not invest heavily when everyone else is
"When they are crying, it's time for buying; when they are yelling, it's time for selling."

6. Only invest if you are confident in the company's prospects
Research and analyses your preferred companies thoroughly.
Speculative companies with no profits, but with great 'potential,'
Attractively valued, profit-making, good growth prospects - predictable result.


www.fool.co.uk
Last edited by sriranga on Fri Mar 09, 2012 9:30 pm; edited 1 time in total

Thank you SRIRANGA.....!!! this is good input of our learning process.....!!! cheers

yeah! SRI!
v can't forget this option too....
I too have few experiences of EARLY EXIT!..

Got down the train early.......!!!
what a feelings.....
but yet happy as some profit is there..... rather than a loss..
Basketball

thanks for the advice!

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