Experience is the acid test

In the second part of our series looking at the fortunes of a share club, David Stevenson describes how the Reservoir Dogs picked its first share and suggests some useful avenues for market research
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The Independent Online
INVESTING in shares at the moment makes you feel like a doomed crusader valiantly charging into the great unknown. Now does not appear to be the best time to invest your nestegg, and although we've seen some City wags state that shares are a bargain at the moment, what happens if this is just the first station on a long journey to stock market hell?

Questions like this were on the agenda at the first share-buying meeting of the Reservoir Dogs share club. We had built up a store of money in the bank, but which share should we buy? Each member had come armed with a top share choice, and the reasons why he or she thought we ought to buy it.

First up was Trafficmaster, a favourite of mine. Its pioneering work on traffic avoidance technology could make it a hot tip for tomorrow. But when I checked the figures I saw that the company was valued at more than pounds 130m - with tiny profits. The massive value relative to its profits builds in a heavy gamble for would-be investors. We'd hope to see profits going up to pounds 7m next year, justifying the huge valuation.

The catch is that the first thing that gets cut in a recession is consumer spending on fancy gadgets like Trafficmaster. The shares are trading at 461p. If they drop below 400p, we will have another look.

One member of our share club has a good working knowledge of Lloyd's of London. The traditional world of names, brokers and agents has been cast into chaos, but what is emerging is a new order made up of large insurance companies covering all three functions. Limit is an investment trust exclusively operating in Lloyd's (and quoted in the insurance sector on the financial pages). We felt this seemed a good bet to make the most of the restructuring. Some members were concerned. Lloyd's has a reputation for taking mighty big hits and if the market hits a wobble again, Limit might be hit badly.

Capital Radio shares were a third choice with strong backing. One member picked Capital Radio as a tip after realising his favourite station - Xfm - was owned by the group. Again, the doom-mongers warned that spending on radio advertising slumps in hard times.

Eventually we decided on Hong Kong and Shanghai Bank (HSBC) shares. The club's guiding principles are to go for high-growth and even high-tech shares. Very large international banking groups don't fit this bill. But we also wanted to buy shares in companies and sectors where market sentiment has turned. In short, we want to mop up unfashionable shares. HSBC may own Midland, First Direct and James Capel over here, but the shares have been savaged by worries over the Far East. The shares hit pounds 21 each at one point, but since then it has been a steep downward descent.

HSBC seems to be one of the best-managed banks in the world. The share club books always tell you that you should use your own experience to make choices. Mine (as a customer) is that the Midland Bank has been turned around since HSBC came along. And then there is the upside in the Far East. The bank has already bitten the bullet and written off millions in bad debts.

If the Far East does pick up, then China is likely to lead the way. The potential is huge for this bank, based in Hong Kong with offices in China.

We have not bought the shares yet. We may have agreed (by a show of hands) to buy, but timing is everything. We have agreed to wait until the shares go below pounds 12.50 and then our stock broker has an order to buy. It could be a short wait, even though our City expert said the bank was rumoured to be a bid target. That sounded like a desperate attempt to talk up some bid action. We think reality will set in and send the shares down to pounds 12.50.

We also talked about research (see box). We liked Jim Slater's newsletter on smaller companies and Analyst, a newsletter with a good long-term track record. The problem is that all good newsletters cost pounds 70 or more a year.

Down at the bargain end of the scale, Investors Chronicle costs only pounds 2.95 a week and is a must for those who want to follow the markets. Just be aware of its "tip effect". We have noticed on a couple of occasions that a share we'd noted on publication day, Friday, rocketed in price on Monday when the markets open again.

The Analyst: pounds 97.50 a year: 0181-289 7966

Jim Slater's Investing for Growth newsletter: pounds 200 a year. Call 0171- 278 7769.

Next month: You have done your research on selected shares, but what do you do with it? Plus how to read all those baffling figures and charts to get to the bottom of a company's performance. And the Reservoir Dogs Share Club will be considering which software to buy in order to track our new portfolio.

make the most of the net

The real goodies for share clubs are on the internet. Here's how we used it to track our chosen share, HSBC.

First stop is www.yahoo.co.uk and find out what acronym your chosen share uses. It will give you up-to-date prices, the volume of trading today and analysis. That is fascinating. There is even a link to Hemington Scott's site, which offers some great charts and trading information.

Once you have identified a gaggle of shares you want to track - for example, your portfolio - just put all the acronyms together in a search line then 'bookmark' the page. Every time you call up the bookmark it will return all the latest information, saving you the chore of having to input all the wretched "symbol" acronyms.

Interactive investor - www.iii.co.uk - is also great. Once you have a portfolio of real or imaginary shares, then you can open up a free portfolio at the site. They do ask for some marketing information, but it is worth it.

The Financial Times - www.FT.com - also has a web site that asks for registration, but contains all the news stories that move the share prices. The FT has its own personal finance site, giving share information, called www. FTQuicken.com, but this was not a patch on Interactive Investor.

You can get detailed research from your stock broker unless (like us) you go for a cheap execution-only dealing service (in our case Hargreaves Lansdown). Hargreaves Lansdown does offer one useful perk - along with a cheap minimum charge for dealing (pounds 10), it also gives you a subscription to a newsletter written by the team behind the Analyst (which we decided we could not afford).

The Share Centre is another discount broker with a whole raft of services, including a premium rate telephone line giving brokers' reports and an internet page detailing daily 'buy' and 'sell' tips.