On behalf of Readers and myself a huge 'THANK YOU' to Stu for creating this insightful scribble, cheers, WD.**
This is the first in a series of blogs about lessons learnt by a newbie stock picker.
I am comparatively new to 'stock picking' having opened my first self select ISA in August 2014. As I have discovered mistakes in investing can be expensive and although the errors detailed in this series may seem obvious to more experienced investors, I hope by highlighting them they may prove of use to some readers.
As Wheelie so often writes, investment performance should be measured by the return of the overall portfolio and not just individual 'stars' or 'dogs'.
In addition to this spread of different sectors the actual number of shares owned needs consideration. Too many shares and the portfolio is likely to act as an expensive tracker, too few shares and market movements of individual shares will lead to exaggerated portfolio volatility - good news when your shares are rising but a nightmare if your shares nose-dive.
Having read books and listened to various experts the optimum number of shares in a portfolio I was aiming for was perhaps between 12-20 different companies.
As well as diversification (owning a decent number of shares from different sectors), the size of each holding is also very important. Portfolio performance can be significantly effected if one share has a particularly large weighting within a portfolio. In a portfolio of 12-20 shares if each holding is of equal weight it will represent 5% - 9% of the total portfolio funds (assuming the portfolio is fully invested). Of course in practice position sizes of each holding might vary depending on investment strategy and the attitude of risk towards the individual investment.
What follows is an account of how things can go wrong if you do not consider position size or do not have rules relating to share purchases:
Bovis Homes Group (BVS) Purchase - 29/6/2015
In the Summer of 2015, a month after David Cameron had been re-elected with an overall majority, I felt the time was right to join the house builders party.
This was my first purchase of a house builders share. Having done my research on the fundamentals and noted the significant uptrend in the price chart I decided to invest in Bovis. The company is local to me (in Kent) and builds houses in the South East which has in the past benefited from significant house price inflation.
I had done well up to June 2015, my portfolio was up, markets had risen, I was over confident. "Look at the chart trend, house builders, low interest rates, a Tory majority, help to buy, what could possibly go wrong? Let's go big!" And so I invested too much. I invested 17% of my portfolio in Bovis at £11.03 per share.
But then the markets crashed late August 2015 following the Chinese stock market problems. Bovis fell to £10.12 - an 8% discount on my purchase price. Little did I know that this was the start of a long term downtrend and the share has failed to get anywhere close to my original purchase price.
Of course because of the size of my purchase related to my overall portfolio the paper loss I have suffered since then has been magnified.
I wasn't unduly concerned throughout 2016 because Bovis shares paid an excellent 4% dividend and it is likely that demand for houses in the South East will continue to outstrip supply for the foreseeable future.
However following a poor trading report sneaked out on 28/12/2016 I reviewed my holding. I thought long and hard about what to do. The company's fundamentals still looked OK but Bovis always seems to disappoint when compared to their peers; perhaps I should sell, but then again house builders share prices nearly always perk up between January and April of each year. I decided to sell half my holding for £8.12 on 29/12/2016 - a 26% loss.
I now have a shareholding in Bovis priced at £8.57 (10/2/2017) which represents 6.7% of my ISA portfolio. I'm 22% down on my original purchase price but I still benefit from a 4.7% dividend and I've invested the sale proceeds in a share that is rising.
Don't invest too much in just one shareholding. Happy days if the price rises but if the price falls the loss is magnified in your overall portfolio return.
I now enter trades with a small initial pilot position of about 3% of portfolio value and if the share price rises by 10% I then add to the position. To manage risk I top-slice larger positions as they increase in value. My largest shareholding now represents 13% of my portfolio, SSP Group (SSPG), which incidentally was my first investment in 2014.
I expect Wheelie might mention psychology and the emotion of greed but I will put this mistake down to stupidity, lack of experience and the absence of position sizing rules.
I hope this article helps you avoid position sizing mistakes.
Thanks for reading, Stuart