The Times (London): Beginner’s guide to stockpicking: “…even professional investors cannot always predict events that dent corporate reputations and thus share prices. Overstated oil reserves have dealt a hefty blow to Shell”: “All four companies were admired and perceived to be among the best. Now all four must rebuild — not their businesses, but their reputations.” (ShellNews.net)
SHARE OF THE MONTH
October 23, 2004
The market’s recent resilience is making share ownership seem suddenly rather more attractive. For new readers, Stella Shamoon explains the rules of engagement for her portfolio
READERS’ letters indicate that you want to know more about how I select my shares of the month.
My remit is to give a monthly snapshot of a business which I believe to be exceptional, and whose shares offer good prospects of profit if held for five to ten years.
I try to pick businesses that meet my criteria of finest quality; first or second in a growth sector and which have the resilience to withstand cyclical downturns. I have recently peppered the mainly blue chip portfolio with smaller businesses such as Telecom Plus, Majestic Wine, Clapham House and Peel Hotels.
The last three are quoted on the Alternative Investment Market (AIM), which means that they qualify for substantially reduced capital gains tax on any profits realised on their shares after holding them for two years or more.
But in a real portfolio, I would not buy shares in a different business each month, but concentrate my capital in a small number of shares, thus limiting risk of error. I do not expect readers to buy all the shares I recommend, but to use my monthly column as a starting point for their own research.
My practice in the past of tallying up the overall performance of the shares may have led some to believe that it is a model portfolio, but this is not the case. You should limit your holdings to between eight and ten shares.
The other Share of the Month rules are:
1. Ignore share tips and the welter of news that comes out of the City every day. Invest in businesses that you understand and be wary of those companies that have to operate in highly regulated sectors.
2. Reinvest your dividends. Statistics show that regularly reinvested dividends account for about two thirds of the growth in a portfolio. Some companies offer reinvestment schemes.
3. Hold on to your shares unless there has been a fundamental deterioration in the fortunes of the underlying businesses.
4. Always investigate before you invest.
The last of these is my cardinal rule. We private investors must be fully engaged — even passionate — when picking businesses in which to put capital at risk as part-owners. We all know a little more about certain businesses than others do, without perhaps realising it. We derive our insights from our personal consumer experience or from our jobs, our hobbies, our children or what we learn from friends and colleagues.
Use your common sense, good judgment, personality, lifestyle and situation to build a share portfolio that reflects the person you are and meets your financial needs. You will monitor your investments with greater confidence, competence and enthusiasm.
The revolutionary aspect of my strategy is to say that we each have a money manager within us — learn how to use your knowledge, wisdom and understanding to pick good prospects for profit.
Do not venture into unchartered and dangerous territory such as buying shares in highly indebted businesses, or using borrowed funds to punt in shares. You cannot completely eliminate stock-specific risk, sector risk or market risk when buying and holding shares, but you can control your bad behaviour as an investor.
My advice is to spread your risk by investing equal amounts in at least three or four sectors with different dynamics. The Share of the Month portfolio is spread between five sectors: technology, media and telecommunications, luxury brands and speciality retailers, financials, oils and pharmaceuticals.
No one, not least me, will get every pick right and none can predict the direction of the stock market in the short term. Especially not now, amid angst and uncertainty about the negative impact of high energy costs on world economic growth, along with the US presidential election and the question of who will move into No 10 after the general election here.
You must also realise that even professional investors cannot always predict events that dent corporate reputations and thus share prices. Overstated oil reserves have dealt a hefty blow to Shell, while Merck was forced to withdraw Vioxx, its blockbuster painkiller. Nokia failed to spot the consumer demand for shell mobiles and AIG is now under investigation for alleged bid-rigging.
All four companies were admired and perceived to be among the best. Now all four must rebuild — not their businesses, but their reputations. None of them is a basket case in terms of financial resources or core competence. All operate in strong business sectors and I believe that it is a greater risk to sell their shares now that they have been so hard hit than to hang on for an inevitably slow and possibly painful recovery.