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Diary of a Dumb Investor: formulas to make me rich

Enough novice winging it. I’m getting my calculator out to upgrade my much-maligned investment process.

 
Diary of a Dumb Investor: formulas to make me rich

Who am I? What am I really trying to achieve? What is it all for?

Those, I believe, are all questions investors like me will have asked at some point.

More specifically, I feel the need to ask: am I a ‘value’ or ‘growth’ investor?

Even as I ask that question I don’t know if the answer matters, but I’m trying to make some sense of my much-maligned investment process.

I guess I’ve been a ‘growth’ man. That is, by my understanding, I’ve been chasing companies that look good by my reckoning, based on a bit of analysis of their offering, the environment they’re working in, how they have done in the past and so on. Nothing too number-y. Shooting from the hip.

My portfolio: Click to enlarge

But I feel I somehow would be, I don’t know, more proper if I became a ‘value’ investor. This, I believe, means someone who uses ratios and stuff to work out whether a share is cheap relative to its prospects. The dull, mathematical – but admirably systematic – sort. Like Citywire’s Smart Investor.

If I want to leave the by-the-seat-of-their-pants growth crowd and join the value nerd crew, I’ll need a calculator and some ratios. I’ve been using some of these to evaluate shares, but kind of fudging it. So I’ve been spending lots of time on Google, Investopedia and Citywire to try and make sense of all the Es and Ps and PEGs and EPSs.

Basically – because the more you look into this, the more complicated it becomes – I gather that you need several ratios to work out whether a company is cheap. No single one on its own is trustworthy.

So you start with earnings per share. Literally how much bang you get for your buck. Or pound as it were.

With this you can generate the classic P/E ratio (or more likely look it up online). This is how much you are paying for earnings (AKA profits) and the lower the better in terms of value. However, you can’t take this number alone. It depends on an earnings number that could be dodgy and besides it needs to be used in comparison with other companies in your company’s sector. There’s a whole range of snazzy different EPS numbers, but what Citywire’s Smart Investor says is that you need to stick with the same one every time.

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20 comments so far. Why not have your say?

Rob Walker

Nov 19, 2012 at 12:28

I rarely take any notice of ratios. For income, buy the best dividend-paying shares when they are cheap (obvious) so my real return on MY investments on BATS, Unilever, Vodafone, Aviva, Interior Services and a few others comes out at around 9%. Growth is more of a punt on what I know and what I read. If I can, I invest where I can 'kick the tires' but generally I can only do that on retail and services I experience. In this category I invested £1000 each in around 40 companies. So far I'm 80% up in three years though that includes total losses on Vyke, Yell, Blacks etc and stunning growth on Petra Diamonds, Xaar, ASOS and a few more. Just today, Oxford Catalysts joins the latter group. I consider the others to be just 'waiting in the wings'. each time I sell half when the price reaches a 100% gain and let the rest of the holding take off further or crash. I don't consider myself Smart, Dumb or even clever, but this works for me. In my portfolio ther are many 'waiting to happen' including Ocado (great service - make or break this Christmas), Zinc Oxide, Lonrho, Cyan and some lame ducks that should recover, including Lamprell and Wincanton.

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Lee Whitehead

Nov 19, 2012 at 13:42

Rob, just reading your post, which is interesting, but what about the added impact of fee's? I mean, assuming you didnt do a block of 40 trades in a short period (therefore reducing your price per trade ratio) a rough estimate of £12.50 x £40 equates to £500 + Stamp duties where appropriate, and top slice gains over 100% would need to cover selling fee's as well...

Do you subscribe to the aggregate orders approach?

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Rob Walker

Nov 19, 2012 at 14:02

Thanks Lee. I'm with HL so the cost of the shares is included with the buying fee. To be honest, I don't bother worrying about the fees but the 100% sell trigger does take account of it (if you follow me) and on trades of £1000 it's only 2% or so of the overall hoped-for gain. As for the 'income' shares I just buy them and hold on.

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Rob Walker

Nov 19, 2012 at 14:08

ps. Not sure what aggregate orders are but if, like Lamprell, they first drop from 300p to 110p, I buy. Then if they fall further to (in this case) 70p I bought again because I thought cheap just got cheaper! At least they don't have to recover so much to get to the magic 100%. However if they keep dropping, common sense tells me to back off. Recovery may be a long wait and any spare cash may be better spent elsewhere.

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wayne roberts

Nov 19, 2012 at 14:14

DI - 10 minutes spent looking at ratios means you have wasted 9 minutes, don't you think people far more experienced and nerdy know more about these things than you and yet are they rich?? Possibly but I doubt it, markets are supposed to be efficient meaning that all known information is reflected in the price but you can't put a value/ratio on sentiment which is what really drives price, you'd be better off looking at what things other people are building 'castles in the air' over and just jumping on the bandwagon - and they're not hard to find if you look at charts - if it is going from bottom left up to top right it sounds like an uptrend so just try to ride it until sentiment changes and it becomes a downtrend, not rocket science.

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snoekie

Nov 19, 2012 at 18:59

Rob, with you on Lonrho, and if it drops by another 1p or so I am in fot maybe another 20,000. Bit mystified why they are dropping. Divi next year?????

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Ian Holmes

Nov 20, 2012 at 05:36

Hi Snoekie. I think there are 3 main reasons for the Lonrho share price continuing south:

1.Lonhro seems to have good prospects in Africa but by divesting itself of the Airline division at a net gain of 33.9m GBP, this only offset what would have been a 10m loss for the half-year thereby instead returning a profit for the period of 23.6m GBP.

2. One of the directors (Emma Priestly) sold almost 1m shares at the end of September at 9.12p each

3. The dividend policy is still awaited! (At least I haven't been able to find it!)

The company's growth potential looks good in its core business, so it might be worth a punt on the basis you suggest..............

Panmur Gordon has a target price of 11p (I never put much faith in brokers' pontifications as I cynically think they are just trying to drive things in the direction they want rather than provide good investor guidance!). It has has also downgraded the Lonrho stock to a hold from a buy!!

Take a look at the 2012 interim report before you do anything, though! You can get it at:

http://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Documents.aspx?type=sl.ra.interim&docid=bb16f0f1-4870-4edb-b1d9-35ea646a9128&user=hl_website_documents

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snoekie

Nov 20, 2012 at 06:23

Ian, thank you for the reminder.

I see the divi is still being talked about. However the continued placement of large tranches of shares other than to the existing shareholders is not a particularly good development, it continues to dilute the existing shareholders share values. This has happened more than one over the last few years.

I already have a fairly substantial holding, and will not be in profit until the price is a tad over 11p. The further tranche will reduce that to below 11 p, but only if they drop a bit more, and that may happen in the next month or so with the shenanigans in Europe, and the farce of the fiscal negotiations of the YS.

Not long to go before we are in '13, but, as you say, I have heard nothing about the divi policy.

Back to the topic, formula, DI punters have been trying to get a successful formula for eons, better to do your homework and decide if a share has a prospect. For example on Lonrho, I added to my holding in 2007 when I saw that the losses of the company were being steadily reduced. Since then I have added steadily to the holding, on dips. But then I am looking ahead a few years.

Profit today is nice but hard to achieve. You win some and you lose some, but even in this market I am still 20% ahead of my outlay, I have been as high as 60%++ ahead. In the interim the income comes in handy. For the moment I am sitting on my hands, I lost out on the BG drop, even though they had taken a steep dive by the time I bought. However, I am hopeful for the future.

Unfortunately you appear to be buying when the shares are fairly fully priced (eg BP).

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Bryan Jefferson

Nov 20, 2012 at 11:05

This is an unusually constructive and intelligent debate when compared with many others on Citywire. All contributors are to be congratulated.

By the way Citywire's spell checker picks up Citywire as a spelling error but not false apostrophes!

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Rustie

Nov 20, 2012 at 11:21

Arguably that was the most boring, tedious, overblown and anally retentive article I have ever read on this computer. You need to get out more....a lot more. And, incidentally, your portfolio follows suite in the boring stakes. The whole exercise, it seems to me, has become a pointless attempt at trying to think of something to say that hasn't been covered by investment 'gurus' a thousand, nay million, times before......and failing. One thing it has succeeded in, and spectacularly so, is attracting comments from the 'experts'. Take for instance the mini lecture by Ian Holmes......if you're looking for bedtime reading to sustitute your sleeping pill this is it. It never ceases to amaze me how many experts there are out there....none of them, presumably, subscribing to the mantra..."there are those who don't know - and there are those that don't know they don't know" Goodnight all.

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Ian Holmes

Nov 21, 2012 at 03:40

Well Rustie, I don't need sleeping pills or bedtime reading to sleep easy at night.

Glad we've helped with your diarrhoea though.................

..........never said I "know". Just a couple of observations of why the share price might be heading south..

Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth. A difference of opinion is what makes horse racing and missionaries!

So thanks for your opinion. Hope you slept well

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Ian Holmes

Nov 21, 2012 at 03:40

Well Rustie, I don't need sleeping pills or bedtime reading to sleep easy at night.

Glad we've helped with your diarrhoea though.................

..........never said I "know". Just a couple of observations of why the share price might be heading south..

Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth. A difference of opinion is what makes horse racing and missionaries!

So thanks for your opinion. Hope you slept well

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Dividend Income investor.com

Nov 21, 2012 at 09:59

In the main, forget earning per share

Earnings per share is a 'ratio' meant for the general public used by the media because it is so 'easy' to compute. Some companies use a number of different types of earnings per share making it 'difficult' for those people focused on EpS figures to figure out which one is the "true" EpS figure. In that case, if you still want to use EpS figures, I suggest you concentrate on the 'worst' EpS figure.

At our end, we generally dismiss any type of EpS figure in our share valuation and financial strength calculation due to the possibility that the "E" in the EpS has been manipulated by all kind of ways.

Instead, in order to ascertain the financial strength of a dividend paying companies, and, therefore its ability to pay, sustain and potentially grow its dividends we are much more interested in thinks like free cash flow. Of course, that requires much more understanding on how Plc accounts are put together and require intensive analysis, and that's why the media, etc feeds the general public with EpS figures.

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Rustie

Nov 21, 2012 at 12:05

Unfortunately I'm not a good sleeper Ian, perhaps that's what has contributed to my Meldrewian persona. Another muse....it seems that all DI commentators are winners - similar to every punter that ever entered a bookmakers...no-one ever loses. Perhaps what irritates me most is the smug, self satisfied and uber confident way commentators sprinkle their advisory gold dust.

Take this extract from Snoekie for instance:-

"Back to the topic, formula, DI punters have been trying to get a successful formula for eons, better to do your homework and decide if a share has a prospect. For example on Lonrho, I added to my holding in 2007 when I saw that the losses of the company were being steadily reduced. Since then I have added steadily to the holding, on dips. But then I am looking ahead a few years"

I mean, come on, how smug is that!

And how about this for mother knows best:-

"Unfortunately you appear to be buying when the shares are fairly fully priced (eg BP)."

You mean he knows?

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Ian Holmes

Nov 21, 2012 at 15:49

Relax a little, Rustie.

The whole country (in fact the developed world) is dying beyond its means at the moment!.

Oscar Wilde famously said "The only thing to do with good advice is to pass it on. It is never of any use to oneself " and another thing he said that is worth remembering - "Whenever people agree with me I always feel I must be wrong.".

Whether he was a good investor, I don't know. What I do know is that there are a lot of fund managers out there who get paid a lot of money for getting it wrong!

Do your research and invest where you think you will succeed. If you find that "anally retentive", boring or insomnia-inducing, put your dosh in a Building Society!

Me? Yes, I've made some BIG mistakes but I've had some luck as well. That's what makes stock investing interesting!

Limit your liabilities and "Happy investing" oh....and sweet dreams!

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Rustie

Nov 21, 2012 at 16:25

Touché Ian....but - just between you and me, you understand - how boring and a/r is tthat pretentious diatribe above from Dividend Income Investor.com? Come on, you know I'm right. I'll bet he wears a cravat.

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wayne roberts

Nov 21, 2012 at 17:35

Dividend Income investor.com - as a member of the moronic general public I'm just going to give you my money as you sound like you really know what you are talking about.

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Ian Holmes

Nov 22, 2012 at 02:17

Now I have a dilemma Rustie! Do I agree with you and prove Oscar right? LOL

Whatever. I hope all contributors found the blog useful. I learned a bit about Lonrho at least! So thanks everyone.

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Dividend Income investor.com

Nov 25, 2012 at 13:23

Cheers, Wayne

If you can, wait till next week when our already discounted extra discounted two year subscription offer becomes available

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snoekie

Nov 25, 2012 at 16:57

Rustie, if I was always right I would have already made a massive profit on Lonrho, as well as all my other investments, and I do have a Lloyds holding at the moment, well down, I recently sold Invensys, £7+k loss, my excuse there is my first broker chose that, as well as buying Nat Express before it crashed, BG, still down on what I bought at and I would have bought James Fisher years ago instead of waiting, and als AstraZ when it was £5, never mind £18.

No I have made mistakes, as I have admitted, but you had your eyes closed at the time. Based on your comment, you must be the paragon, the second coming??

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