Well, what is the point of blogging? I've been writing these blog entries for quite a while now, erraticaly of late, admitedly.
I suppose, at its most basic, I like writing stuff down, I find it a useful way to order my thoughts. It also helps to lodge ideas in my head, so that I can come back to them later.
It is also useful to keep myself in the habit of writing, just putting one word after another, is something of an art. Like most art, the art is in making it look easy and effortless.
I've mentioned before, for blogs, I stick strictly to the rule that they are written at one sitting, and once checked, they are uploaded and are immune from subsequent revision.
Looking back, I have worried away at some topics. I don't feel that I have really arrived anywhere useful thinking about criminology, maybe it is a topic for exploration through some short science-fiction stories. Crime and punishment seem quite straightforward, with issues in black and white, and right and wrong, but once you start to delve it becomes clear that substantial castles are built on insubstantial sand. Crime is what we want it to be, as a society, punishment is there to make society feel good about itself, more than to make criminals feel bad about themselves, or fit for re-entry into society.
Similarly I have worried away at investing in shares. In parallel I have thought about decision making. There is a strong link between the two. In order to invest in shares you need to make all sorts of decisions, on a constant basis. You need to balance competing priorities. You need to re-prioritise sometimes, or even reappraise your underlying strategy as the market changes.
If you had perfect foresight, you would invest completely in the share that would offer the best rate of return. However you do not have perfect foresight, so you need to adopt strategies that balance risk and reward. It is like going to a horse race and betting on a wide variety of horses in the same race, in order to make a return. In order to really understand what you are doing, you need to step back, and look at your decisions not as single decisions, but as components within a strategy of decision making. You are constantly trying to find fault with your underlying theories and strategics.
To elaborate my strategies,
I have an underlying belief that across economic cycles money invested in shares will continue to offer a worthwhile return.
However the economic cycle follows a sine curve, so if you buy at the top of one wave, you will not make a real return again until the top of the next wave.
It is difficult to know where you are exactly, but it is possible to get a gut feeling. For example for many businesses it was clear that the rate of acceleration was slowing a year ago. There was a frenzy and over-extension of credit, that felt unsustainable even then. We are now past the peak, and descending down. It is likely to be years before we reach the next peak, the absolute trough could even be a couple of years away.
As a small investor, you need to reduce dealing costs to a bare minimum, through not paying much commission, and not selling often. As long as commission is low, it is okay to buy often, as it gives you the benefit of pound cost averaging.
The only time you actually make money is when you sell, similarly the only time you lose money is when you sell at a loss, or the share is wiped out.
As a small investor your other disadvantage is that it is difficult to get a sufficiently diverse portfolio. You should have six or more different shares, but it is only worthwhile selling a thousand plus pounds worth of shares. The maths is easy enough, unless you have thousands you cannot invest effectively. You are just playing at it, and are excessively exposed to risk.
I tackled this by aiming for a thousand pound target in chosen shares, starting with a few. Each month I invest a hundred pounds, and this goes to whatever is short of the thousand pound target and looks to be a sound bet at the time.
I very seldom need to chose new shares to invest in, about once a year at my current rate of investment. I therefore have time to think about shares that I am interested in.
In order to be interesting, the following are essential
the business needs to be basically well run - if I don't have confidence in the business, if I feel they are making mistakes, then I don't touch them.
the business needs to be one that has a long term future, that will respond well, and take advantage of the changes to the world economy that I foresee.
the business needs to be totally unlike anything else I already have.
I do not look at the financial details in any detail. If it is getting to the stage where the business has failed and is getting broken up, I'm not likely to come away with any money anyway, whatever the accounts said.
I don't pay much attention to short term predictions. I cannot trade at that level.
I don't worry much about the PE ratio, I reinvest dividends, so whether I get capital growth, or dividend return, makes no difference anyway.
I do keep an eye on the following
large rises and falls across the market - daily
value of shares - weekly
general media coverage - ongoing
specific coverage of that particular business - when other factors suggest that I ought to.
Because all shares in the portfolio are monitored each week, from the purchase of the first hundred, by the time I have a thousand pounds worth of shares, I have been looking at the share weekly for a good year. Within that phase of the economic cycle, I therefore have a good understanding of the degree of volatility and return that the share is offering.
To date my biggest success has been British Energy, I always felt that basically it was well run, it had too big a share of an energy market, which was short on supply, and long on demand. Takeovers were always a possibility, which makes me feel that there is a quick return option available. Also it was overly volatile, rising or falling with great vigour. Clearly the market was taking an excessively short term view, so there were always opportunities to pick up cheap shares.
My biggest loss, Bradford and Bingley. Fortunately my gut feeling was that the business had no long term future, and I sold half my flotation shares for a decent amount, particularly as they had cost me nothing initially. However as they fell, I bought more, and bought into the rights issue. They are currently wiped out, and although the government might offer some return, it is far from certain.
There are clearly lessons here, I should have trusted my instincts and sold the lot. I should have either stopped buying or sold out as they fell, to retrieve something. However in fairness, the truly dire state of affairs was never really public knowledge, and the bank would never have been technically insolvent anyway, it was a cash flow issue, not a fundamental balance sheet one. Also in truth, Bradford and Bingley were less aggressive than some of the banks that have now been bailed out by the government. They were small enough to get nationalised, but too big to be allowed to fail. Also logically, the buy to let market could be more resilient than the usual mortgage market, as people lose their houses, they still need somewhere to stay, so buy to let could benefit over the next few years, for those who got in early.
However they clearly failed the basic tests, they were badly run, they had no long term future. They should not have been in my portfolio at all.
For the future, basically, I have what I already have, I am content with my current shares. My most recent addition was a European investment trust, to add diversity, but the pound -euro exchange rate is nosediving, so any purchase of European shares would currently be very expensive.
It is clearer what I would not touch. I never liked the banks, largely on the basis that I did not understand how they made money. Additionally, any business that the government has a stake in, is bound to be unpredictable, and they do have a poor record of respecting shareholder's rights. Retail is uncertain, they are all suffering, but obviously some will survive.
I suppose big infrastructure type businesses, that are immune to the downturn, so energy, water, transport, telecoms, outsourcing, ports, things that have an innate value whatever happens, and that you cannot particularly defer spending on.
Ideally now is the time to invest broadly, a third of the shares could be wiped out, a third might do nothing much, a third could do very well. So the more broad the portfolio, and the sounder the underlying businesses the better your chances. But clearly it is not a nil risk option.
Investing in shares is an interesting mix of disciplines, you need to appraise qualitative and quantitative data, and make decisions based on both. My instinct is to rely on qualitative data more than most.
We are constantly faced with making decisions based on conflicting disciplines. For example, a lot of my initial blogging was about different prioritisation techniques, for example the Get Things Done methodology.
Over time, I have come to realise that I actually like to alter my approach slightly. Some of this is just down to boredom, but some of it is down to the changing external environment.
There is a world of difference between prioritising a variety of large tasks that often don't need to be done quickly, or small tasks that need done quickly, or a mixture of both.
Additionally there is also the situation where there are more tasks than time available, and the return on doing tasks can vary dramatically, so something that was important yesterday might be irrelevant today.
Factor in that you have different energy levels, and different opportunities at different times. This is not a single list of discrete items, but a nuanced proposed strategy to maximise benefit from a finite resource, namely your limited time and energy.
There are considerable similarities between how you might approach these two problems, getting a return on investments of money, and getting a return on investments of personal work time.
Part of the point is that there is no optimum solution, there are strategies that are more likely to succeed, but that is certainly no guarantee.
This blog has really not ended up where I expected it to, that is probably the point of blogging, you don't end up where you expect to. But you can have a rant along the way, and maybe even learn something about yourself, and how you think about things.
