A piece of advice: cut losses, run profits

It seems obvious, but in practice many people do exactly the opposite

Passengers on the cruise ship "Private Investor" have a motley crew of stockbrokers to look after them. Those travelling steerage are served by the cabin boys and girls who will just do what they are told and are not able to offer any helpful advice, no matter how choppy the seas get. In the trade these young folk are known as execution-onlys and they take the approach that if the passengers get seasick they only have themselves to blame.

Passengers on the cruise ship "Private Investor" have a motley crew of stockbrokers to look after them. Those travelling steerage are served by the cabin boys and girls who will just do what they are told and are not able to offer any helpful advice, no matter how choppy the seas get. In the trade these young folk are known as execution-onlys and they take the approach that if the passengers get seasick they only have themselves to blame.

Should you feel the need of some guidance there are junior officers, called advisers, who will offer you their professional assistance based on years of experience. They will expect a reasonable reward but in return they will suggest various ports to visit and attractions to see. But at the end of the day you must make the decisions.

Those passengers who can afford first class cabins are able to employ the services of a dedicated senior officer. He will look after all aspects of your journey for you, even to the extent of assessing the weather and telling you whether to stay in bed or not. This is the discretionary broker.

"You get what you pay for" is a particularly apposite cliché when it comes to stockbrokers. There's no doubt execution-only dealing has taken the sting out of brokers' commissions but its popularity makes me uneasy. It appeals to new investors who want to keep costs to a minimum but surely such players need guidance? It is a worry I discussed with Chris Ring, managing director of NatWest Stockbrokers. His views should be relatively independent because his firm offers execution-only, advisory and discretionary brokerage.

"It isn't solely about experience," he said. "I believe it is about enthusiasm, about people wanting to make their own decisions. Investing in equities is a great hobby and there's a real thrill in picking winners for yourself. As long as you have done your research thoroughly there's nothing wrong with going it alone as far as the final decision is concerned.

"Of course advisory brokers have a role to play, particularly for people who have not got the time or the inclination to do their own research. They can bring an added dimension and opinion to investments you have chosen and are also a useful sounding board when you want to discuss the risk weighting of your portfolio."

In practice, Chris said, most investors give discretion to professionals anyway because they usually have a certain amount of their funds in unit trusts or investment trusts. So don't be shy about giving discretion on your total portfolio to a stockbroker or investment manager.

I tempted the stockbroker into a spot of crystal ball gazing. What sectors did he fancy would do well in the next three to five years? "The world is obsessed with communication and health. It is not rocket science to predict that information technology, telecoms, healthcare and pharmaceuticals will do well," he said. "They are the sectors of today and tomorrow. Specifically, I would pick Marconi, Glaxo, Cable and Wireless and Vodafone."

These are all big boys and I wondered whether he had a fledgling stock tip to pass on. "In a word, no," he said. "There are so many small companies, many of which are high-risk investments, that I think that the safest and more than likely the most rewarding route would be to pick a biotech or technology fund managed by the likes of Finsbury."

Our conversation turned to Europe. I pointed out that UK private investors were keen to diminish the risk of a falling pound and to take advantage of emerging countries across the Channel by buying shares over there. The drawbacks seem to be high costs, research difficulties and a convoluted broking system. Chris agrees but is confident that matters will improve quickly.

"There are exciting opportunities in Europe," he said. "Demand will dictate that soon we will be able to buy and sell as easily as we do on the home market, but meanwhile I would advise taking a stake via the specialist funds." He particularly likes Henderson European Micro Trust, which concentrates on smaller European companies. Launched last month at 100p (this week's price 102p), it selects companies from the sub-£250m area and is able to invest up to 20 per cent of the fund in unlisted companies. Among the trusts devoted to larger companies Chris suggests you look at Gartmore European.

Chris had a final piece of advice for investors: "Cut losses, run profits. It seems obvious, but in practice many people do exactly the opposite. They sell their winners, hold on to their losers, and kid themselves that they are making a profit. Mention the losers and they retort: 'I'm hanging on to them until the price comes back.' How naïve can you get?"

***

Ever since I read, a couple of weeks ago, about a 25-year-old futures trader who panicked and lost £750,000 in an afternoon as he chased the dragon and tried to recoup his losses, the story has been worrying me. Eventually he fled from his desk and rushed out of the building. He was prosecuted and sentenced to three years' jail.

If those are the facts, then the law is an ass and the real culprit in this sorry tale has got off scot-free. In a market where fortunes can be made and lost in the twinkling of an eye, how can a respected City firm have a trading system in place which is not supervised instantaneously? Whoever gave the youngster the means to trade hundreds of thousands of pounds in this way deserves the prison sentence. The young man in question should have counselling and be banished from a City desk until he has undergone proper training.

terry.bond@hemscott.net