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Pick the brains of the best stock pickers
Over 100 Your Money readers descended on the FT’s offices on Wednesday to quiz our top stock pickers on how best to make money from the market.
The event was introduced by Philip Coggan, the FT’s investment editor, who looked at the likely returns investors could achieve from current market levels and the current thinking on ideal asset allocation.
Our panel of My Portfolio columnists - John Lee, Nick Louth, Peter Temple and Kevin Goldstein-Jackson, then offered their personal advice on private investment and answered questions from the floor, and from e-mails received from FT readers. The pick of questions and answers appears below.
For more information on the FT panel, click here
For Your Money highlights click here
The most thought-provoking online contributions may be published in the Financial Times newspaper. Please supply your full name, company and location.
What sectors would you consider buying presently? Which would you sell?
Andrew Crook, Sucden (UK) Limited
Kevin Goldstein-Jackson: I do not buy sectors – I prefer to look at individual companies which could be in any sector, even those sectors that have fallen out of favour with the majority of investors. Within every sector (even booming oil) there are good and bad companies.
Where do you see the retail environment going in the next 6 and 12 months in particular the furniture sector? Is the sector a hold, buy or sell environment?
John Clarke, Silentnight Group Ltd.
Kevin Goldstein-Jackson: As with all sectors, there may be individual companies within the retail sector that may be worth buying - it depends on how much their products will appeal to the public and at what price. Also bear in mind certain key factors of the companies concerned, such as debt levels, quality of management, undervalued assets, take-over potential and ability to develop exciting new products. Has Silentnight considered producing a modestly priced, easily adjustable (ie: can be positioned at different angles) padded headboard that could be fitted to almost any bed to make viewing TV from a bed much more comfortable? Many people might be interested in buying such a product…
I have recently purchased some United Utilities shares as I am attracted by the defensive qualities and high yield. I am looking to complement this other defensive high-yielding stocks but wish to diversify away from United Utilities’ water and electricity profile, and would like to avoid Tobacco and Defence sectors. Any suggestions would be most welcome.
Gwendal Collis, Senior Finance Analyst, Vodafone Commercial Finance
Peter Temple: A couple of suggestions. Northern Foods has a fairly high yield (around 6%, I think), reasonably well covered, although recent trading has not been inspiring. Also you might look at callable preference stock issued by banks and insurance companies. There are several issues, all of which are tantamount to very high quality corporate bonds, but which yield in the region of 6%. I believe there are minimum investment levels and also some additional holding costs (around £30 a year), as they are settled through Euroclear.
As a former fund manager one of my aims was to find investment opportunities that offered the potential for steady long term growth and thus would remain a part of the fund for a period of years.
Do you feel that the shorter time horizons of much of the investment community today is enabling foreign corporate investors and the private equity sector to remove from the quoted markets the number of these quality investments to the detriment of long term returns?
Kevin Goldstein-Jackson: Yes – it’s also especially detrimental to private investors who bought shares in companies for the longer term because they thought the firms were undervalued by the market only to find institutional investors sold out to private equity firms who then ran the companies for a few years before re-floating them on the stock market at a much higher price. Perhaps the Government could be persuaded to encourage more people to invest directly in shares by abolishing stamp duty on share transactions by private individuals buying shares directly in their own names.
Peter Temple: This criticism of short termism among fund managers has been a perennial complaint over many years but is, I think, without either much merit or relevance. If it were true and events unfolded as you suggested, then it would be open to other investors to take advantage of these undervalued situations themselves.
I wonder if you could give any useful hints on selecting the right time to sell a share when it is on the rise. Is there some way that amateurs can better gauge the likely amount of travel in a stock once it is on the rise?
Kevin Goldstein-Jackson: There are a number of pointers that can indicate when it might be worth taking some profits on a rising company share price. These include large scale selling of shares by directors, a price-earnings ratio that has become much greater than other firms in the same sector, a new expensive headquarters. Also think about selling if the people who founded the company and steered its success have left the company, the company’s products are no longer innovative and competition has increased, one or more highly regarded institutional investors have substantially reduced their shareholding.
John Lee: From my experience private investors tend to sell their successful holdings far too soon - as long as profits /dividends are increasing, stay aboard - real money is made by staying in for the long-term. As Warren Buffet says: “If you aren’t going to hold a share for ten years, don’t even think about owning it for ten minutes.”
Peter Temple: The short answer is that if a share is rising, don’t sell it. Only look to sell, or at least consider it, if the share falls 15% from an all-time high. Even then, it may not be right to sell. The other time to sell is a if share loses you more than 10% at the outset, or if it issues a profit warning.
I have an interest in the markets and there are a handful of companies that I have been following in detail for some time. I have built models on them and I’m about to start investing in them but I am told, regularly, that most retail investors lose money by investing directly on their own account. How can I, as a retail investor, get an insight into a company which the plethora of analysts in the market do not already know about?
Kevin Goldstein-Jackson:Pick small, well run companies that have yet to attract the attention of lots of analysts. While institutional investors may know lots about many companies, sometimes vital information might be blurred or the institutions may draw mistaken conclusions from all the information. Remember, it was not just private investors who lost money by investing in Marconi, Invensys, and a whole host of other poorly performing firms – some institutional investors had large stakes, too. It is how you assess all the information that is important. The “fundamentals” and “figures” may seem sound – but look at what the company actually does. Do you and your friends like its products? If not, are other people likely to share your views? If it is a retail chain, visit the shops: if there are few customers and the product range is dull, then why buy the shares? Also consider companies about which you have personal knowledge because you have bought and like their products and/or services – and the management, accounts, prospects, seem good.
Peter Temple: Look only at smaller companies, research them thoroughly. Invest, if possible, in companies you know and understand. Cut losses quickly and run profits. Get your market exposure through cheap tracker funds or exchange traded index funds.
John Lee: You should certainly go along to the agm, meet the Board and ask to be shown around. If the meeting is being held off site then try to arrange for a separate visit. Companies, particularly smaller ones, are much more willing to accommodate requests than people imagine .
What’s your attitude to non-executive directors investing in a company they have no money in. Is there a conflict of interest?
Martin Foyer, private investor
John Lee: Fair question. As a rule I will not invest in businesses if directors do not have a significant stake in the business. With a view to non-executives I like to see them investing in the companies - they are more of a guide and more important. Non-executives are freer to invest in a range of plcs than executives who are investing in their livelihood therefore if they choose to invest more in a particular company then it is a very positive sign. I don’t believe there’s a conflict of interest.
The panellists don’t seem to take any central approach. What do you think of different systems e.g. the Higgins System? Have you taken this approach? What are your experiences? Do you have a life outside investing?
Tony Cox, private investor
Peter Temple: I tend to focus on three or four investments decisions in a year. I’m trying to find the last piece in the jigsaw - I’ve spent about 12 hours in the last month looking for a long term investment.
I wouldn’t recommend trying to make money by following director dealings. But I do look for a specific type of investment situation, such as retail concepts at an early stage that can be rolled out nationwide and break-ups and spin-offs. I’m interested in GUS spinning off Burberry, but I have no system. I prefer to look at patterns
I think you have to spend a lot of time but more importantly have to enjoy it and find it interesting. If you find it dull you won’t make progress. I find the stock market lively & interesting. I look at the overall jigsaw and rather than focusing on particular sectors I focus on particular companies. I generally don’t invest in biotech companies.
How do you view the P&O situation? Would you hold or sell stock in light of the takeover talk?
Michael Brown, private investor, Manchester
John Lee: I generally believe you should stay with companies - if a company is in play - like a bid situation surrounding P&O - it’s normally better to stay in for the duration. I have made mistakes selling too soon. If it’s a good company stay with it. The shipping market is growing 9% per year so companies in it are good stocks to stay in. At some stage the value will come through so I would stay put and not sell.
Peter Temple: From past experience I would say it’s better to sell. I bought BAT in 1989 for £3 a share and when there was a bid my stock broker offered me £12 but I decided to stick to it. That was a mistake as the takeover did not happen and the share price did not get up to £12 for three years. If there’s a takeover then I would always advise you to take the money as soon as you can!
One sector I have an aversion to is mining. What is your assessment of mining stocks?
Colm Fagan, private investor, Dublin
Nick Louth: For now we may have seen the best of the returns from mining stocks. Obviously there has been a huge upsurge in prices from chinese demand. However, mining stocks are hard to predict. We could see further rises but you would need to do your research very carefully.
Peter Temple: I don’t invest in mining on an individual level, just in collective investments. I don’t understand what makes the industry tick.
I find getting rid of losers difficult - what’s your policy on this?
Colm Fagan, investor, Dublin
John Lee: This is an interesting area. If I were to criticise myself, it would be for letting disappointing performances run on too long. If you look at your portfolio on a daily basis and have 2 or 3 stocks making big losses it strikes at your confidence. If you get rid of them, they’re in the past and you can look for the next opportunity.
Nick Louth: If a stock has underperformed by 15% over 3 or 4 days it could be a trigger. People have different ideas. It’s the ones that will never recover - the Marconis of the world that you don’t want anything to do with.
Kevin Goldstein Jackson: You should look at the reason why stock has gone down, not just the volumes. It may actually be a further buying opportunity if a stock goes down. Do your background research carefully. Unfortunately life has been made a lot more complicated by Hedge funds for individual investors.
Peter Temple: The pain barrier for me is usually a limit - a certain number of pounds stock has lost. Of course, look into it. If a company has faltered from an all time high, it may be worth hanging onto still. However, I have found in the past that if I’ve ignored my pain barrier, it’s always cost me more in the end.
I would like to ask about CSR - the blue tooth technology company that reported amazing figures on Tuesday. What do you think about the area?
Keith Hurst, private investor
Nick Louth: I’d like to say something about the seductive lure of a high increase in profits and sales. There’s something very dangerous about companies that appear to be part of the technology cycles. The danger is products getting superseded in the short term. The companies are vulnerable to the next new product that comes along. I would recommend caution about reading too much into impressive sounding results.
How do you find companies to invest in, apart from your FT sources? And which companies do you recommend investing in?
Andrew Harford, private investor
John Lee: An easy one - read my column in the FT!
I often focus on the small cap sector. I use traditional yardsticks such as the p/e ratios and dividend yields. I would also recommend reading the financial sections of the good papers. I also frequently ask the company to send annual reports or I go to AGMs to get a feel of the company and the board.
A number of small cap companies are willing to see private investors because of their lack of publicity. They encourage you to go to AGMs, giving you the opportunity to talk to all the board individually and get an insight into the company.
Kevin Goldstein-Jackson: You don’t have to be a shareholder to visit a company either. For a small fee, the UK Shareholder Association will allow you to look at a company.
Peter Temple: I like to see companies with a high return on equity - preferably over 20 per cent and I prefer to look at cashflow over earnings. Price to sales is quite a good yardstick for most companies.
Would members of the panel invest in commodity shares?
Emailed from Don Pearson
Nick Louth: Commodity stocks can have a place in a balanced portfolio but investors should have very clean objectives. Which metal? What is the outlook for supply and demand in this metal? Which stocks offer the best exposure? The highest risk commodity shares are those where the mineral has yet to be recovered, and should be considered speculative.