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Diary of a Dumb Investor: time to reload my short gun

I'm happy to take a profit on my bet against France's CAC 40 stock index and plot my next move. I don’t want to get greedy here.

 
Diary of a Dumb Investor: time to reload my short gun

Brup brup! I’ve just closed the most successful trade I’ve made in my year-and-a-bit investment career, a bet against France’s stock market, and now I’m looking for something else to sell short.

Read Dumb Investor: the story so far

A brief recap: three weeks ago exactly, I bought a leveraged, synthetic exchange-traded fund (ETF) designed to give me twice the opposite of whatever France's CAC 40 stock index does each day. What with Europe wobbling again, and the upcoming French election, I smelt blood – or should I say garlic?

It went pretty well, as I had for once made a timely investment, instead of repeating my knack of buying high only to sell low.

Since pouring £1,068.25 into the fund, the CAC has lost about 8.6%, and I’ve made over 10%, or £109. Which does, of course, vindicate all of the nay-sayers who warned that the pledge to try to give me double the French stock index’s losses was no guarantee that the ETF would actually manage to do so.

But because of those cautions, I’m far from disappointed with the ETF’s performance; in fact, I’m positively thrilled with it.

This morning, after reading the results of the first-round vote in the French election, I chose to sell out. As I had hoped, my man Sarkozy was edged into second place by Hollande, who is slightly to the left of Lenin, I believe. Markets are running scared as I write this, also hurt by some bickering in the Dutch government.

‘Buy the rumour; sell the news’, is something I read in an FT column a while ago. And that is more or less what I’ve done.

Who knows what will happen in the two weeks before the next round of voting in the French election? And is the European Central Bank going to step in again to support Spain’s bond market? I just don’t know... so am happy to take a profit and plot my next move. I don’t want to get greedy here.

‘DI, subscribe to the following Golden Rule – Success is 10% inspiration, 90% last-minute changes when trading these instruments,’ advised Michael Peters Fenwicks, a Citywire reader. ‘Take the profit daily/weekly as motivation while constantly readjusting your position to hedge risk.’

Well, as another reader pointed out, it’s probably too expensive to keep nipping in and out of the ETF, due to all the charges I would incur along the way. Yet I think I’m still adhering to the spirit of Michael’s advice by selling out of the fund after holding it for three weeks, even though I don’t plan on going back into it in the near future.

Of course, it’s all well and good that I’ve made a hundred quid on that punt, but the rest of my portfolio is looking rather pathetic, with Lloyds (LLOY.L) and BP (BP.L) unsurprisingly being the biggest offenders.

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23 comments so far. Why not have your say?

chazza

Apr 23, 2012 at 12:51

Hollande 'slightly to the left of Lenin'???

My dear DI, you've led a short and sheltered life. My guess is that M. le President Hollande will disappoint the left quite as much as Mitterand did. So I think you did well to take your profit while there was one to take.

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Tom Smith-Jones

Apr 23, 2012 at 13:33

"Since pouring £1,068.25 into the fund, the CAC has lost about 8.6%, and I’ve made over 10%, or £109. Which does, of course, vindicate all of the nay-sayers who warned that the pledge to try to give me double the French stock index’s losses was not guarantee that the ETF would actually manage to do so."

Am I missing something here?

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mike88

Apr 23, 2012 at 13:57

At what point will DI decide to sell his poor performing stocks such as LLOY.L? We are aware of his policy of selling winners but at what point will he decide to sell his losers? On this occasion he has made the right decision to sell his ETF but he should not have bought it in the first place as, arguably, that was more of a gamble than an investment. After all this column is Dumb Investor not Dumb Gambler!

Deciding when to sell is often more tricky than deciding when and what to buy. But, as I've stated on many occasions on here, a stop/loss system should have been in place so as to prevent slipping into the common trap of believing that falling stocks cannot go any lower and regard such price falls to be a buying opportunity.

BP is another case in point. A great Company which is surrounded by uncertainty due to potential litigation that can go on for years. If the price continues to fall will he hang on as is the case with Lloyds will he bite the bullet and sell infavour of something else?

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Michael Peters Fenwicks

Apr 23, 2012 at 14:41

DI

One lesson take from this I guess is not wait for the Last Judgment as It happens every sec/min/hour of the day when it comes to these instruments due to their volatility.

I am thinking that one should pick battles(shares) big enough to matter and small enough to win(Profit).

Well done old boy..........

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Matthew Charles Flinders

Apr 23, 2012 at 14:55

Tom Smith-Jones...i was also confused by that paragraph lol.

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RL

Apr 23, 2012 at 15:08

If you can't be Smart be lucky!

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snoekie

Apr 23, 2012 at 16:05

mike88, Lloyds. I am hanging in there, and BP, let it keep dropping and I will buy in more. In the meantime the divi will keep coming in (and more with an increased buy), and maybe next year, latter part, a divi for Lloyds, that was not my initial intent (wanted the divi), but having bought in and seen the news I added to my holding.

At the moment DI is speculating rather than buying solid stuff paying divis, which could be used to drip in for more purchases. Old expression, and valid here, easy come, easy go.

Sorry DI, but unless you are 'trading' you have nothing to write about. The drop shown by today's chart has a way to go, and Lagarde is in dire conflict with her position as head of the IMF and her position on the Frankfurt group. Her support for the Euro will only mean a harder landing and longer recovery with bitter medicine to be swallowed during the long recuperation because of the failure to take action months ago.

The failure of the Yanks to take action on their debt doesn't help the situation and Osborne's loan to the IMF just makes our recovery that much harder and longer. I have little doubt but that Cameron will cave in to the demands of more money for Brussels to squander.

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Hotrod

Apr 23, 2012 at 16:46

Today 4.20 pm

FTSE 100 down 2.14%

CAC 40 down 3.00%

In fact pretty near every stock exchange worth mentioning around the globe is trading lower today. They can't all be falling because of the French general election. There has got to be wider issues.

Looks like DI has dropped publishing a facsimile of his portfolio. I'm sure his supendous gain would not look so good when guaged against the losses of his/her other investments.

Also as others have queried, could he?she? please explain how 8.6 X 2 = 10

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Dan Binks

Apr 23, 2012 at 17:05

I think DI is just observing that the 8.6% drop in the index ought to have translated into a 17.2% gain in the ETF if the ETF held true to its advertised objective. That it only returned a 10% gain is vindication for those that suggested the ETF might not deliver double the drop in the index.

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mike88

Apr 23, 2012 at 17:35

Hi snoekie.

DI originally bought Lloyds at the beginning of this series of articles on the advice of Tony a contributor on one of the City Wire investment forums (who conveniently has stayed silent throughout this series) and clearly it was a mistake...................a very big one. DI has held on to these shares even though there seemed to be no prospect of a recovery.

You are a current holder and are considering buying more. That will of course lower your average buying cost but are you sure you want to add to your holdings? Investors no doubt speculated on buying shares in Woolworths (and countless other business failures) as the price fell but look where they ended up.

Some might argue Banks are different. They might be but bank failures are not unknown. Indeed 13 have gone under in the US in 2012 alone and whose to say this might not happen in the UK. The dividends in Lloyds might have been good historically but high yielding stocks are high yielders for a reason.............. mainly because their price has slumped.

I thought Dividends in Lloyds had been suspended (possibly untrue) and that the bank is on course for a £5b loss this financial year. You might therefore have to wait years for the share price to recover if ever. Thus no dividend and a huge loss is no basis to buy or even hold a share.

I'm not having a go..............honest as I know we've clashed in the past........... but, as I've said previously, I cannot see the logic of holding or buying even more shares in companies such as Lloyds where the price is in a consistent slump.

Am I missing something?

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gggggg hjhjkl;'

Apr 23, 2012 at 18:01

Well Done DI!!

I do think, as with others that you are gambling rather than investing, but so be it.

Whatever, do not get caught up in thinking you are becoming a clever investor/gambler, you WERE LUCKY, that is all. Next time you may well not be so lucky.

As to the question of Lloyds and whether to sell/buy more etc. This a dilemma many face. In my case it applies to RBS which I bought half way down the ladder as it were ( in large quanitity I might add). I review my holding regularly but to date I have held on as I can see no advantage in taking the residual value at this time. Both have been up, down and round the houses.

For your Lloyds I can see no rational to taking your chips off the table (note the gambling context, to make you feel at home) at this point in time, has, as it serves as a timely reminder in both of our cases of the mistake we made, which is no bad thing.

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snoekie

Apr 23, 2012 at 18:28

Mike, I filled my socks a bit more when Lloyds were @25p. I have no plans to buy more, but if the price is right for BP, I will buy more.

In the meantime I am watching GSK, BG and a few others with the firm intention of buying into and adding to other investments I hold, all paying dividends. Mind you the BG dividend is measly.

Next year I will rationalise my portfolio, selling some smaller losers and other, profitable, holdings to reduce the 45+ holdings I currently have paying 2% and less.

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ynys

Apr 23, 2012 at 18:53

'now that I’ve done a bit of shorting, I’d like to do some more. It’s fanatastic!'

Or maybe: now that I have made a small win on the roulette wheel I'm sure I'm on a run. It's just so easy isn't it!

. . . where angels fear to trade.

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jones the spy

Apr 23, 2012 at 20:38

As far as I'm concerned DI lost his way last year when he got started with the dumb so called investments he did.

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mark caines via mobile

Apr 24, 2012 at 07:16

Mike88 is exactly right. Without a proper exit strategy (stop loss would be best) you will continue to lose money overall. DI ask yourself realistically at what price you would have sold if the fund had gone down - I reckon it would have been below a 25% loss. Now consider what that means if you are right 50% of the time, i.e. 50% of the time you make 10% and 50% of the time you lose

25%. This is why you need to set an initial stop loss. In this case I would advise, say a 30% gain, or a 10% loss.

Unless you start doing this you will under perform the market year on year jumping from one investment thesis to another one.

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Juliette

Apr 25, 2012 at 21:09

DI- your column is very enjoyable and I'm learning a lot in the process.

Re: Lloyds, I too took Tony's advice and bought the shares which have plummeted dismally. Like Snoekie, I'm hanging on to them for the meantime. It's takes courage to sell at such a massive loss - but maybe that wiill come later.

The Lloyds mistake was a tough lesson learned at the beginning of my investment journey and I'm now a lot wiser about investment decisions.

One of the key things I've learned about investing in the last year is that buying solid companies with dividends and diversifying my portfolio is key. Also, the funds I have invested in have, without exception, fared worse than individual shares. This may be my choice of funds, but nevertheless, worth noting.

Shorting... not sure I'd have the courage to go there!

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Spotdog

Apr 26, 2012 at 07:32

Am also stalking BP. What would anyone mean would be a good entry point?

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Dumb Investor

Apr 26, 2012 at 10:21

Alright have avoided the temptation of shorting someone else - for now - and put 1,000 quid into RIT Capital Partners this morning; saw it was at a discount. Like the idea of owning a bit of Rothschild...

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mike88

Apr 26, 2012 at 11:24

Well done! That is an investment even though RIT is hardly a stellar performer. It's relative popularity has ensured there is a small discount to NAV.

In the Global Growth sector over 1 year RIT ranked 18 out of 34; over 3 years 27 out of 34 and over 5 years 18 out of 33.

While there might be better investment trusts out there you have at least invested in a product that could become a core holding in a long term portfolio.

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Hotrod

Apr 26, 2012 at 11:44

Seems to me like another scatter-brained decision.

First you buy an ETF hoping to make a killing in 3 Weeks, now you buy a fund whose track record is pedestrian.

Firstly I would not have touched the ETF with a barge pole, too risky; given the very small amount of capital you have available to invest. Alright, it came good, but you could have so easily lost a sizable chunk of it.

As regards your latest purchase: OK it's sound, but I don't think It's the sort of investment which is suitable for a portfolio worth less than £10,000

You have got to understand that some people have acorns, other people have coconuts, but your investment is just peanuts.

Personally I like to run winners and sell losers, and with just 10 grand I would certainly reduce your holdings by half.

As regards stock selection do you not think it would be better to concentrate your efforts on one or two types, rather than running about all over the auction.

Another good strategy is to have a watch list (phantom portfolio) to act as a bench mark. This way you can buy with positive conviction because you will have studied the stock concerned in greater detail and understand more about its potential.

I don't know, but I would think your stock-broker would offer this facility for free.

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Dave P

Apr 28, 2012 at 14:10

Well, since we need current input, a trading attitude is better for the reading public than a long term investment strategy.

Keep 50% or more in some of your current losers and keep us happy with some spec trading. You are obviously to the manor born.

Suggestions: if you are determined to short the market, pick gold at levels just under $1,700 on the next run-up which should be soon due to Spain.

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wayne roberts

Apr 28, 2012 at 17:53

I don't know what this article is about any more.. its not about investing (unless investing in the downfall of a European country is what investing means nowadays), its not about trading (he refuses to learn or practice anything to with trading - "I don't have the heart to look at charts" I recall him saying at some point, so what is it actually about?? Would be more accurate if it was called 'random half-baked ideas that I hope and pray will work out and how not to make money'..

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Dumb Investor

Apr 30, 2012 at 10:31

Thanks Dan Binks, that is exactly what I was trying to express!

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