Investment: Shares with appeal for private investors
No Pain, No Gain: Our Man's Portfolio
Wednesday 17 February 1999
Many of the early-retired have developed share trading into a lucrative hobby, swelling the ranks of the private investor. The growth of execution- only stockbrokers as well as the continuing wellbeing of many of the smaller, established stockbroking firms is due to the increasing army of small shareholders. Over the weeks ahead, I will be attempting to assemble a portfolio of shares with particular appeal to the private investor.
There are two prime types of private investor - those who are prepared to enjoy the thrills and spills of a straightforward punt and those keen to establish a wide-ranging portfolio which they hope will stand them in good stead, perhaps emerging as a second-line pension.
The much maligned punter, an essential factor in any market, is akin to a gambler, moving in and out of situations, hopefully grabbing a profit in the process. The longer-term shareholder decides to do his own thing because he fails to see the logic in paying a fund manager to do the job for him. Many fund managers do not inspire confidence and one can only express bewilderment at some of their actions.
There is also the problem that many investments groups are now so big they can hardly avoid getting caught up in investments they later regret.
Their tendency to stick to the 100 Footsie constituents is understandable, but it seems that, after ignoring the undoubted value on the market's undercard for years, a few have recently ventured forth among the tiddlers.
Anyone building a portfolio should have three categories of investment - blue chips, mid caps, small caps and adventure shares. As the portfolio progresses there will invariably be a fourth category - shares which should have been sold.
Blue chips should stand the test of time. Despite various setbacks - some now see the 1987 crash as a mere blip - they have enjoyed a relentless advance over the past 20 years.
Even a perennial under-performer like Allied Domecq has shown some return. It has moved ahead, going from 80p in 1979 to around 450p. Last year it touched 634p. There were, of course, many better investments but, excluding inflation, there is still a profit and the drinks group has paid increasing dividends over the years.
I think any portfolio should have a handful of blue chips which are more or less regarded as fixtures. Anyone starting a build-up should think about a modest interest in the high-flying drug and telecom sectors, but might feel that in 10 years' time Imperial Chemical Industries and Marks & Spencer will look in better shape than they do now.
All the historic evidence suggests they will, although both may yet have to hit their low points. An electronics group, like GEC, and a utility likeThames Water, should also feature. Entries from the mid and small cap categories should be given a rather less permanent status. They should be looked at as long-term holds but there must be a willingness to chop and change, taking a profit or accepting a loss.
Adventure stocks often lurk deep on the under-card - bright hopefuls, recovery situations or spots which the rest of the investment community may have missed.
The fourth category should not exist but I bet it will. Too many small investors are slow to sell. They fall in love with shares and eventually it becomes too late for them to make any realistic sell decision.
An example is Ronson. Floated as a brewery at 60p, it got to around 80p and now bumps along at less than a penny. No shareholder from the days when the shares were above 50p should still be in the luxury goods group which Victor Kiam is attempting to turn round. Yet quite a few still are.
Each week in this column I hope to put forward investment suggestions which will appeal to - and more importantly make money for - the small investor. Any investor knows that money will be lost whether he takes the long-term view or loves a punt. The portfolio trick is to let profits run and cut losses.
This is easier said than done but careful selection and more importantly a broad mix of investments should ensure a profitable outcome.
After all, investment or unit trusts are merely a version of pick-and- mix. By using an execution-only broker, a small investor, with around pounds 30,000, should be able to build a balanced portfolio and a good return can be achieved with quite a lot less than that.
But beginners beware. The stock market takes no prisoners. Market professionals think they know it all and love to take inexperienced shareholders for a ride. The old fashioned "ramp" is alive and well and lurking to entrap the unwary.
I have been covering City affairs since 1958 and I hope to avoid such pitfalls by creating a wide-ranging portfolio. Building a portfolio is a long-term game and, as they say in the advertisements, shares can go up as well as down.
But, as I have indicated, the long-term market move has been upwards and I see no reason, allowing for the inevitable occasional hiccup, why it should not continue.
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