Share Strategy

Investing Unusually

Over the last two and a bit years I have been investing in the UK stock market. I believe that in this relatively short time I have begun to develop my thesis on one method to use to invest in stocks. I must point out that I am careful to point out that my method is by no means the definitive method, nor the most effective, nor even complete. However, I can say that my method has worked for me. Each of my CURRENT holdings has had on average a 27% rise on the price that I first purchased at (note that some of these shares I may have only held for a few months). Furthermore, I believe that others could replicate my logic.

Investing - less waffling, let's get straight to it:

The general idea  is that much of price fluctuation is down to emotion. People seems to overreact to situations. When a certain stock is "in", people go mad for it and the bull run of that stock begins. When a stock is seen as bad, people seem to dump it as quickly as if they were holding a stick of dynamite. Whilst there is usually some underlying reason for buying or selling a stock investors seem to lose their heads a little.

We can utilize the frenzy. Be a contrarian. Go against the crowd. It's simple(ish): Buy what everybody else is selling in an overreaction. In the summer of 2010 the UK (and the rest of the world) were dumping banking shares. The likes of Lloyds and RBS had crumbled from the dizzying heights of 700 pence down to 20 pence. No one was buying banking stocks except a few investors, of which I was once of them. I bought into both banks as well as into Barclays. I have since then seen a return in Barclays of 70%, Lloyds of 58% and RBS of 33% and I plan to hold these for the long term. It is my belief that whilst they may never again reach their past peaks they may at least make me a decent return in the meantime!

How I developed my investment strategy?

The first shares that I bought was Aviva in 2010. I bought it on a recommendation from a well known stocks and shares tip website. In the first few days of owning the shares, they went up in value by about 5%, before tanking after the Japanese earthquake in 2011. Whilst I shouldn't have been trading on tips in the first place, the decline in my share value made me think: wow, I wish I'd bought these Aviva shares now that they've lost half their value. Since then I bought and sold shares in Weir Group after they crashed from 2000 to 1500 pence. I sold them at 1900. I am currently sitting on a 56% profit in Centamin plc after its share price fell dramatically after the miner experienced supply issues in Egypt.

Of course there have been one or two failures as well. I bought into Lonhro after a friend told me about it. I wasn't interested until the price went from 20 pence to 11 pence. However it now sits at 8 pence. What I learnt from this experience is a golden rule that I would tell anyone looking to invest: never invest on someone else's recommendation (even mine!). Stop being lazy and go and do some bloody research!

My method seems to work when I read in the paper about a share price crashing and then researching into the fundamentals of the company. If I feel that it's share price tumble is down to a short term blip (like supply issues or natural disasters) rather than symptomatic of a longer term trend then I will buy. It will become fairly obvious if the share price is a result of a longer term trend if the assets of the company are in decline or turnover and profit have been steadily decreasing. There is nothing complex about this style of research it simply requires a little patience. From my experience, most falls in the stock market are not investment opportunities, however, I am still required to research each big fall from each day in the hope of finding the one Picasso that was thrown away.

Morality of investing

I must point out that this style of investing is not for the person who likes to upgold their morals. The miner, Lonmin Plc were recently experiencing strikes that escalated in 40 or so of their workers being shot. This turned out to be a perfect buying opportunity as the share price fell to a quarter of its peak several months later. Some people may not feel comfortable investing off the back of other people's misery. Personally, I say it doesn't matter. We're here to invest and make money. If you're decisions are affected by your lefty liberal hippy douchey tendencies then I say "go home! You're in the wrong business. Go and set up a charity somewhere and stop wasting everybody's time complaining!" Too harsh? Perhaps. But this style of investing will require you to make every situation into a black and white one as it requires decisiveness and timeliness. If you take too long wondering about the grey areas you'll lose your chance to make large profits.

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Unknown said...

This whole idea of emotion driving things and and becoming a self fulfilling prophecy is so true. I know George Soros gave this whole concept a moniker and of course he's certainly benefit from these types of of trends. As Buffer said, be greedy when others are fearful, and fearful when others are greedy. I supplement this with a small percentage of Not surprisingly, it looks like the top couple of economies on this list are in Asia. I've heard it said that the Chinese are the true capitalists, as we westerners have turned statist! With power moving to the East, any brit or European would be wise to have stable alternative investments in hard assets like farmland and forestry as well.

Mr. Moneybanks said...

Hi Peter, whilst I don't appreciate you putting up links to your website in your comment I will make a rare exception and leave your comment up simply because you've mentioned my favourite quote of all time: Be fearful when others are greedy and greedy when others are fearful.However, in my opinion investing in Eastern farmland and forestry tends to be a bit of a con and I'd recommend my readers to avoid such investments. Buffett also said: Stick to what you know and understand!