Beginners Share Dealing - Short Term Holding

Everybody knows that shares should be held for the medium to long term, you can't go onto a share dealing forum or investment site without being told this.

As a beginner in share dealing it is easy to believe this, but is it true?

It is clearly true that many companies that survive over the medium and long term have share price increases and may have paid dividends which a lot of people reinvest in the company.

What the medium and long term hold argument ignores are the losses that occur when you are holding shares in a failing or failed business or one that suffers a big share price drop over time.

When should you have sold your shares in Yellow Pages, Woolworths, Royal Bank Of Scotland....?

As you read more and more on the traditional view it becomes clear that just about all of the information is sourced from the experiences of professional fund managers.
Now let's state the obvious, professional fund managers are different from private investors, they run funds that are intended to last for 50, 100 or more years, are worth hundreds of millions of pounds and usually have new money added on a continual basis.

Most private investors will start in their 40s or 50s and will need to stop adding and start withdrawing money from their investments after 15 - 25 years.

Repeat the point: most private investors have a fixed date for when they will have no new money to add to their investments and will need to withdraw dividends and capital.

So does buying shares with the intent of holding them for the short term which is the strategy discussed here make sense?

Beginners Share Dealing, A Strategy

The strategy discussed here is focused on individuals who have roughly £5K to £100K to invest.

If you have a fund of over £100K then you probably already have your own strategy and if your fund is much less that £5K, then the amount of money that you will be gaining using these strategies may be too small for the necessary effort.
  • The basic ideas is that you take your investment funds and break them up into pots of around about £2K-£10K, the size and number of pots being dependent upon the total amount available.

  • A good size for a pot is £5K but there is nothing magical or scientific about this, it is like a 30mph speed limit, experience says that it is a good starting point.

  • These pots are then used to purchase shares in a range of solid companies,(FTSE 100, 250 or All Shares but not The AIM) trading at around 30%-50% off from their recent peak price but not "falling knives".

  • These pots are then sold when they offer a profit in the range of 5%-15%, meaning that you are selling well below their peak prices and hopefully trading each pot 5-10 times per year.

  • Although these profits sound small, taking them means that at the end of the year there has actually been some growth, rather than none whilst waiting for that "big one".

  • The objective is compound growth, as each investment is slightly larger than the previous one you only need 18 trades,not 25, at 4% to double your original pot.

  • The low profit and high trade frequency aims to avoid the much more frequent than you might expect massive share price drops, overnight 20%-40% drops that wipe out the growth from all the other trades.

  • History is quite clear, at some point in time there will be a big stock market drop and you need to be able to accept a few years of no growth whilst the market recovers.

  • Because of this short term holding has to be aimed at building a pot for retirement rather than for current income, so it is best suited to those who have a job or another source of regular income.

If you think this sounds too easy, try it and you will find otherwise. The work involved in doing this is not trivial, expect to spend about two hours a day on this.This not a get rich quick strategy based on it once worked by luck, it is a disciplined, almost engineering approach.

This approach is contrary to the traditional view that shares should be bought and held for a number of years as I believe that doing this is very risky for the smaller investor.

When I started trading I was surprised by the number of apparently safe and stable shares that would drop 20%-40% overnight and then stay at the new lower value for years, it is far more common than you might expect.

The point of going for small profits is that such opportunities are frequent, relatively plentiful and as far as any share dealing can be low risk, these are. Significant growths, those much over 15% are much rarer and generally occur over much longer time frames.

Instead I am happy holding shares for a few hours up to about three months, possibly letting it drag on for 6 months although this would be regarded as a failure.

Despite the short term nature this is not gambling and is very different from CFDs (Contracts For Difference), Spread Betting or Day Trading. There is an objective and if that objective is achieved within a few hours, then so be it, sadly but as you might imagine the few hours is much more of a theory than a reality.

Another "everyone knows" is DYOR (Do Your Own Research) when deciding which shares to purchase, it is critical to understand that you have NOT done the necessary research because you can not.

Probably the final factor to consider is the management ethos, do you understand the management's motivations and do they match yours? Initially I was staggered by the number of failing companies that had management taking large salaries because "we are worth it" and surviving on new share issues every year.

Now the tough part, when you buy a share you should decide on when you will sell it, but things are looking good and there is more profit if only you wait a bit longer take the profit or loss.

Spread sheets can be your enemy here the spread sheet says hold on a bit longer and the numbers will look great, the spread sheet still says that as the share price drops back down and your pot is no bigger.

Finally don't get depressed by the missed opportunities. I've watched Dixons shares rise and the business merge with Carphone Warehouse but it could have been Comet who won out and Dixons who went under.

The Private Investor's Advantage.

Imagine a share in a company that has low trade volumes and is undervalued by 60% but can only be bought in chunks of £5,000 per day (without massively affecting the price).

A professional managing a large fund and needing to invest £50 million this month will have no experience or interest in trading this type of share as the total available investment is too small for him.

Yet for the private investor for whom a couple of purchases (£10,000) would be a significant portion of their total investment this could be a great buy.
There is a profitable market that the professional is effectively excluded from simply because the absolute profit available is too small.

These companies are not questionable start-ups on the AIM, they can be FTSE 250 or all share companies.

The really nice thing is that rock solid FTSE 100 companies are also available to the private investor, so it's a win win. The professional investor is excluded from smaller opportunities but the private investor is not excluded from the bigger ones.
Section Items

Current Market Suitability
Stop Icon Retreating into cash just before the EU/EEC referendum seemed prudent, but what now?

We have a long period of negotiation and can you afford to be out of the market for two or three years?

The sound bites are clear to me, nobody knows what the post BrExit market will look like, so there is a real risk of investing in business areas which may be sacrificed to reach an overall deal. An "Open Skies" deal seems very likely but an agreement on tea may not be.


Current Holdings
I would like to display my current holdings but at the moment opinion seems to be that this may be deemed advice and covered by Article 53 of the Regulated Activities Order.