Fair score in year of two halves

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The stockmarket climate has been much tougher in 1996. At least that is what I conclude from assessing my performance as a share tipster. Over the last 12 months I have done well, with an average gain around 14 per cent. But much of the rise came in the first half of the period, with an average gain around 24 per cent.

Where I do score is by comparison with the performance of the stockmarket as a whole. Since recommendations are made weekly, the correct benchmark is against the difference between the FT All Share index at the end of the period and its average level over the preceding 12 months. My rough calculations suggest, on that basis, that the index is up less than one per cent. Smaller companies have done relatively well over the period, though.

Any outperformance is good news because share prices generally have been in a strong uptrend for many years. Since the bear market low of January 1975, the FT All Share index has risen more than 36 times, translating into an annual rate of appreciation of over 19 per cent. Most unit trust managers would be very happy just to equal that performance; hence the vogue for index-matching tracker funds.

The odds on backing my selections have also been reasonable. Out of 85 selections, 56 are higher with two unchanged and 27 lower. One statistical aid for investors is that, at worst, a declining share can only lose 100 per cent of its value. A holder may feel that is quite a hit; but shares going up can multiply their value many times over. Fund management group, Perpetual - frequently tipped in this column - has risen from a 1990s low point of 30p to over pounds 21.

Investors can reinforce this bias towards success by using a "stop loss" rule to limit their maximum loss. My favourite is a 20 per cent stop loss. Not only does it keep losses manageable, but a 20 per cent decline in an individual share, particularly if the overall stockmarket is reasonably steady, is often a sign of trouble ahead. A 20 per cent decliner, not mentioned below, is software services group, Rebus, a spin-off from insurance broker, C E Heath. The firm is trying to compensate for the maturity of its core insurance market by developing speculative new services aimed at the TV and mobile phone industries.

Another rule is to sell on a profit warning. Four companies which I have tipped over the past year - Porvair, CPL Aromas, Tunstall Group and Quality Software Products - have issued profit warnings. All four are adamant that these are just hiccups. But my preferred strategy is to sell immediately, even if the shares have already plunged on the news.

Speculative shares are dangerous. Apart from the profit warnings, the bulk of the significantly loss-making recommendations are "blue sky" shares such as: odour-sensing equipment maker, Aromascan; security systems group, IES; Internet and multimedia players, Netscape Communications, Firecrest and Epic Multimedia; and two other high-technology hopefuls, Recognition Systems and Fibernet.

Investors have become less optimistic, bringing share prices of all blue sky stocks down - regardless of prospects.

There is also a case for steering clear of: "penny shares" which, almost by definition, are in troubled companies; mining and exploration shares, which move wildly on the vagaries of drilling results; and even "blue chips" in mature industries buoyed by takeover rumours.

Which leaves well-run, expanding companies. The list of selections, many re-recommended at successively higher prices, includes companies which are world leaders in niche areas of high technology such as Eurotherm, Druck, Psion, Cobham, Huntleigh Technology, and Halma; strong players in the impressive UK-based computer services industry such as Admiral, Misys, Sema, Logica and FI Group; the new breed of pub retailers such as Regent Inns; well-run building industry groups such as Morgan Sindall (reporting 8 August), Severfield-Reeve and Kingspan; and companies being revitalised by new management such as engineering products distributor, Wyko (also reporting 8 August), packaging specialist, API, air conditioning products and pump hire group, Andrews Sykes, specialist chemicals concern, Amberley, and construction and rail services specialist, Jarvis.

If the company has not given a profit warning and the share price has not dropped 20 per cent below the recommendation price, hold on.