Derek Pain: A month of woes has slashed thousands off my profits
No Pain, No Gain
Saturday 19 March 2011
To paraphrase a former prime minister, a month is a long time in the stock market. When I reviewed the 12-year performance of the no pain, no gain portfolio last month, a gain of £105,000 was recorded. Since then the price of oil has soared, more eurozone worries emerged and doubts about the strength of Britain's economic recovery have increased. The Japanese tragedy is creating additional pressure.
It is not surprising that such a catalogue of woe has extracted a toll on shares, and the stock market has lost its February exuberance. The blue-chip Footsie share index has suffered reverses, and is looking increasingly vulnerable. A period of uncomfortable weakness could stretch ahead. But buy and hold investors should put their heads down and wait for the agony to disappear.
The brave could even venture forth. After all, investors who have taken advantage of share setbacks in the past should have achieved handsome rewards. Only two years ago the Footsie was struggling around the 3,500 points mark and the City was shrouded in deep gloom. Since then progress has been quite scintillating. For example, the portfolio constituent Whitbread was bumping along at around 700p. Since then the shares have almost touched £20, but fallen back in the general unease and, admittedly, a disappointing trading statement.
Small investors should always adopt a safety-first approach. It is no good borrowing money and getting into difficulties. Stick to using spare cash you can afford to surrender.
I would also counter against short-termism. Leave that to those who think they know their way around the stock market. I have encountered many that felt they could play the system and make a quick and easy fortune. Some have succeeded, particularly in the short term. But an uncomfortably large number have come a cropper when shares unexpectedly moved against them.
I suppose the portfolio's quarterly performance helps to illustrate the unpredictability and volatility of the stock market. At one time it was recording a near £150,000 gain. Subsequently profits – fortunately it has never suffered losses – were reduced to £70,000 or so. Now £105,000 has been cut to not much above £100,000 in just a few weeks. Dealing costs and dividend income are ignored in my calculations.
The portfolio seems to have more loss-making constituents this time. Shares of Patsystems, a specialist in electronic trading systems, are suffering from reduced profits, but a stronger display is expected this year. Clarity Commerce Solutions, providing software for the leisure and retail industries, is a casualty of worries that some customers may be reluctant to buy its products in the cost-cutting climate. The accountancy group Lighthouse is a long-term underperformer. The shares seem to be undervalued, but their continuing weakness is worrying. SnackTime, too, has had a disappointing run, probably because it has to digest an acquisition that doubled its size.
My most recent recruits have done quite well. Avation, raising £10m via a share placing, touched 119p, and is now 111.5p; Capital Pub Co is 131.25p after stretching to 146p; and Rivington Street Holdings reached 44.5p but has since relapsed to 36.5p.
I am still hoping to add one or two to the portfolio. My belief is that 16 constituents represents a sufficiently widely spread holding. However I am not wedded to 16, and realise that many small shareholders could find such a collection too difficult to manage, as well as a far too expensive excursion.
Among the shares I have under scrutiny is Wm Morrison, the supermarket chain. It is clearly enjoying considerable momentum with its core food and drink sales, but seems to be rather late increasing its range of non-food items and engaging in online trading. Such developments will be expensive.
Lamprell, an oil back-up group, is also in contention. Its year's figures are due towards the end of this month, and it seems wise to await them.
But I am not confining my search to these contrasting groups. I am still wondering about Animalcare, a much smaller operation supplying products to vets. It recently produced healthy-looking profits, and seems set to make further progress.
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