A proposal for moving the Club forward in the coming year

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garindan
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A proposal for moving the Club forward in the coming year

Post by garindan » Sun Apr 10, 2016 7:03 pm

Members,

As promised - I have set out a proposed strategy for the Club. It has taken me some time to put these thoughts together into something I think is a reasonable basis from which to fine tune our future activities. It is a very long post and contains two parts:

- buying and selling strategy proposal
- an assessment of our current portfolio

Please take time to read through it and then let's have a discussion below. Hopefully this will consist of:

- questions about stuff I have not written very well!
- expression of parts you like the sound of
- expression of parts you don't like the sound of or could be done differently

I'm looking forward to your comments and hope we can take a good fresh look at how we proceed :thumbup:

==
ALL STATS AND FIGURES CORRECT AS OF 10 APRIL, 2016

(i) Buying and selling strategy

The Club will build towards a portfolio of up to ~8 shares, consisting of:
- a foundation of 4 or 5 long-term shares
- up to 4 short- to medium-term shares at any one time

The strategy is to build income from the long-term shares and make quicker gains from share value increases on the short- to medium-term shares.

Long-term shares

The long-term shares should:
- be bought on the basis of generating income of ~5% or greater, per year, via dividends
- be bought on the basis of having good potential for long-term growth
- each be from different market sectors to protect against poor performance
- generally be held for a number of years
- generally be exited from should the value increase by 25% or more from the purchase price
- generally be held even if the price decreases by up to 25% from the purchase price

The Club should look to increase stakes in long-term shares. This should be approached so as to ensure as evenly distributed investment as possible. Investment should be targeted when prices are favourable, thus aiming to ensure the continued long-term growth potential. Therefore, once the Club is ~3 years old, it should aim to have at least four strong long-term holdings, each of at least £1000+ in total.

Short- to medium-term shares

The short- to medium-term shares should:
- be bought on the basis of having a very good potential for short- to medium-term growth
- each be from different market sectors to protect against poor performance
- be held for a period of up to a year
- generally be exited from should the value increase by 15% or more from the purchase price
- generally be exited from should the value decrease by 15% from the purchase price
- be exited from should the share no longer be deemed to meet the brief of a short- medium-term share or could alternatively be converted to a longer-term share if it meets that brief

In general, the Club should look to sell short- to medium-term shares for profit and within a year of purchase. Therefore, by the time the Club is ~3 years old it should have made a number of short- to medium-term share trades, hopefully for profit. Each investment made should be no more than £600, including costs at this point in time to prevent undue risk.

Selling shares

Every share has an exit price, even those considered as a longer-term investment. There is nothing wrong with taking the profit when it meets your requirement earlier than expected. Likewise, there comes a point when a losing share cannot be kept any longer for risk of further loss. The Club needs to use limits to capture these and other scenarios.

There are three automated limits available to the Club to control sales. These are:
- limit:sell – used to sell shares when the value increases to a target sale price
- stop-loss:sell – used to sell shares when the value decreases to the lowest allowable price
- tracking:sell – used to track the peak share value upwards and set a stop-loss:sell price at a fixed margin below
Each share should have at least one sale limit set. It is suggested:
- each share has a limit:sell set at a price deemed realistically possible, according to historical value analysis and forward forecasting
- each share has a tracking:sell set (25% for long-term investments and 15% for short- to medium-term)

By setting a limit:sell for each share the Club puts in place a static price that represents an agreed return for the investment, which is automatically triggered when the current share value breaches the threshold. This is an important automation as it removes the need for a manual sale, which might not be implemented quickly enough to take advantage of a spike in share value.

Long-term shares should have their tracking:sell limit decreased to 15% if the share reaches a +15% value. Short- to medium term shares should have their tracking:sell limit decreased to 5% of the purchase price when the value of the share hits +5%. By rolling-up these limits the Club can attempt to minimise a loss and attempt to build a profit in the case of every share.

Selecting shares for potential purchase

As a Club, we need to be able to identify potential shares for purchase, assess their merits and determine what the entry and exit prices might be. This needs to be done so that there is a reason to purchase, otherwise we greatly reduce the ability we have to make a profit on our investments. Previously we have been a bit too anxious to get on with the purchase, which is understandable seeing we were just starting out and wanted to have some shares in our portfolio. Now we have a number of shares we need to learn from the experiences to date and become more strategic in our buying practices.

Firstly, we need to split our efforts into longer-term and short- to medium-term. Each has a different set of requirements and our selection process needs to take them into account. Secondly, we need to identify a number of different shares to monitor for each type of purchase. If we are able to judge sensible entry and exit prices before purchase we will be able to bide our time and purchase at the right price.

Buying shares

Before buying any shares the Club needs to make a decision about which type of share should be bought. This may be either a long-term share or a short- to medium-term share. Which will depend upon the current makeup of the Club’s portfolio and the attractiveness of the share price.

Through the process of selecting shares, the Club will have set out target entry prices for each. If the Club can also agree on prioritising this list of shares it will make the buying process easier. We can then simply buy the highest ranked share on the appropriate list that meets the target entry price. There would be no need for a vote as it would have been pre-agreed. This method would allow purchasing to be efficient, timely and provide the Club with increased opportunity to make a profit. If no shares meet the target buying price the investment would not need to be made and further discussion could take place.

Reviewing market conditions

The markets can change very rapidly. An investment made one day for a specific return can be quite sensible only for the outlook to be completely different the following week. In this sense the Club must monitor all shares within its portfolio and re-assess whether the objectives for each share can realistically be met. Similarly, the same review is needed to ensure the details about potential shares to purchase reflect current market conditions.

Extraordinary circumstances

There can be occasions where extraordinary circumstances can significantly depress the prices of shares in general (such as the Chinese stock market depression) or within a specific market sector (such as experienced within the UK supermarkets). When such circumstances occur it may be prudent to suspend some, if not all limits, until a normal situation is resumed. This is similar to when stock markets suspend trading because of knee jerk reactions. When such circumstances arise discussion can take place to decide on the appropriate course of action.

(ii) An assessment of our current portfolio

Share plc (SHRE)

Purchased 500 shares @£0.41 at a total cost of £203.50 on 08 October, 2014
Value currently £135.00 + £3.10 dividend (-32.1%)
Dividend of £3.70 due on 15 June, 2016

These shares were bought to take advantage of shareholder benefits enabling Club share purchases to be most economical at £525+, rather than £750+. The benefit of holding these shares will most likely cease to be useful to the Club in ~2 years if we continue to grow our funds at the current speed. Unless the value spikes and it makes sense to sell for a profit we should hold these until they cease to be useful to us.

United Utilities (UU.)

Purchased 60 shares @£9.56 at a total cost of £573.70 on 26 February, 2015
Value currently £574.50 + £22.77 dividend (+4.1%)
Dividend schedule not announced

This was bought as a long-term share investment for the club. The value of the share has peaked at ~+5.5% and fallen to as low as ~-13.5% during our ownership. Share value was affected in 2015 by a water contamination problem that has since been resolved. Since this and the market turmoil the value has steadily risen back to the purchase price. The yearly dividend return has been ~4%.

UU. is currently outperforming savings accounts and seems to be a reasonable hold for the Club.

Sainsbury (SBRY)

Purchased 200 shares @£2.79 at a total cost of £557.24 on 26 February, 2015
Value currently £577.00 + £24.40 dividend (+7.9%)
Dividend schedule not announced

This share was bought with the aim of making a short-term profit. The value of the share has peaked at ~+3.7% and fallen as low as ~-20% during our ownership. The share initially made modest gains before, shortly after purchase, two major events sparked a downward spiral. The major supermarkets were found to be reacting far too slowly to the growing popularity of the smaller and low price focussed food retailers. In addition Tesco was found to have financial irregularities, which impacted the sector. Both of these issues were in addition to the global market turmoil. Finally, it emerged early this year that Sainsbury wanted to buy Argos. After initial scepticism from analysts the atmosphere surrounding the takeover seems to have warmed.

Sainsbury is currently considered the supermarket making the most proactive steps to take on the smaller supermarkets (ALDI and LIDL) and the large ecommerce powerhouses (Amazon and Tesco Direct). Share price has recently recovered and is now at its highest level since September 2014. The partnership with Netto has still to be formally reported on but initial signs are good, seeing the expansion of the store network. Additionally the takeover of Argos, now recommended by the Home Retail Group, will happen and for a price that does not seem as excessive as might have been reported should the competing bid from Steinhoff have remained in play.

The initial premise for buying Sainsbury has clearly not been met. Looking back at what has happened in the 13+ months since the Club made the purchase suggests it is clear news about ALDI and LIDL will not be ‘new’, the Tesco financial saga seems to have played out pending a possible fine and the uncertainty over the Argos purchase is now over. The main question moving forward will be how will Sainsbury actually integrate Argos into its operations, what actual efficiencies can be made and will it work? It is likely such questions will not be answered for at least months, if not years. At least in the short-term the major disruptive forces look to have gone and perhaps now there will be a period of calm.

The return on our investment is currently pretty reasonable, looking at the current statistics of +7.9%. In fact it is the second best return of all our shares to date. The dividend is actually better than United Utilities (only ~4%), a share we are holding for long-term income, whilst the current price is also more than what the Club paid. Whilst we may have originally bought Sainsbury to make a quick profit it may be wiser to consider it as a long-term investment, especially when considering the potential analysts see in the Argos takeover and the as yet unreported Netto partnership results. The Club needs to decide whether this is a valid consideration for changing strategy for the share or whether Sainsbury should be sold. In the case of the latter we should implement a tracking:sell immediately (at the equivalent of 3% value) to lock out a loss (subject to share price fluctuation by the time we have made a decision) and then consider either an immediate sale or allow the tracking stop-loss to be rolled-up in a move towards the original target price of 300p (+8%).

GlaxoSmithKline (GSK)

Purchased 38 shares @£14.71 at a total cost of £559.15 on 21 May, 2015
Value currently £559.17 + £14.44 dividend (+2.6%)
Dividend of £16.34 due on 14 April, 2016

GSK was bought as a long-term share for generating Club income. Since purchase the share has struggled to stay buoyant during the market turmoil. However, since a low point at the end of September the value has slowly increased to what is currently almost identically the purchase price. The value of the share has peaked at a negligible amount above what the Club paid and has fallen as low as ~-16% during our ownership.

Our 4th quarter dividend payment is also boosted by the award of a special dividend. If we had owned the share for a whole year come 14 April, the dividend would have equated to a 6.8% return. Without the special dividend it would still equate to a 5.4% return. Share value aside, the dividend has been significant and meets the initial intention for the purchase. If the recent share value recovery continues and after the imminent dividend is received the share will have performed adequately and have outperformed savings accounts.

ITV (ITV)

Purchased 246 shares @£2.52 at a total cost of £619.19 on 28 August, 2015
Value currently £586.46 + £4.67 dividend (-4.5%)
Dividend of £34.69 due on 27 May, 2016

This share was purchased as a short- to medium-term investment, mainly with the hope of a takeover. To date that has not happened. The share made gains, peaking at ~+10% in December 2015 but fell back to a low of ~-9% in mid-March. Since then it has made a slight recovery back towards the purchase price.

An unexpected special dividend was announced as payable alongside the final dividend. This special dividend would mean a projected annual return of 6.4%, as opposed to 2.4% without, should the Club have owned the share for a year. The special dividend is a great bonus for the Club, especially considering growth is currently negative.

Analysts believe ITV is currently a ‘strong buy’ and the outlook for the Club remains the same as when purchased.

Royal Dutch Shell ‘B’ (RDSB)

Purchased 42 shares @£15.38 at a total cost of £646.00 on 15 February, 2016
Value currently £731.01 + £13.77 dividend (+15.3%)
Dividend of £34.69 due on 27 May, 2016
Dividend schedule not announced

The Club invested in Royal Dutch Shell ‘B’ shares as a longer-term income generator. Despite only owning the share for a short period the oil sector has seen a moderate recovery in share value, resulting in significant early growth. Added to this a dividend has also been received. The forecast dividend return for a full year is ~8.5% of the purchase value. So far the share has performed better than expected.
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Re: A proposal for moving the Club forward in the coming year

Post by William Joseph1 » Sun Apr 10, 2016 8:21 pm

It took me a while and several readings to make sense. Not sure if I have got it all yet. But seems to be a good proposal.
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Re: A proposal for moving the Club forward in the coming year

Post by kevinchess1 » Sun Apr 10, 2016 9:02 pm

Yes it does
I'm in favour of setting automatic stops it saves having to vote all the time

I'd like to see this applied to every purchase
I still think we should sell Sainsburys though
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Re: A proposal for moving the Club forward in the coming year

Post by AAAlphaThunder » Sun Apr 10, 2016 9:35 pm

You have certainly done your homework and kept a keen grasp on our investments.

Everything you have written I concur. (Me, personally, I would have built a portfolio of eleven shares, with six long-term and five short-term).

Yes I would vote in favour of upgrading SBRY to a long-term hold.
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Re: A proposal for moving the Club forward in the coming year

Post by garindan » Sun Apr 10, 2016 11:13 pm

William Joseph wrote:It took me a while and several readings to make sense. Not sure if I have got it all yet. But seems to be a good proposal.
Feel free to question your understanding of my text so as to be sure you think I mean what I do!

It is difficult to explain some of the things in as simple terms as possible. I've given it a go. I've read some share guidance myself over the past weeks and I must say some of it loses me too... :!:
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Re: A proposal for moving the Club forward in the coming year

Post by harinmenon » Mon Apr 11, 2016 11:30 am

Thanks for explaining this all very clearly. Apologies for my ignorance and limited knowledge about the markets, I am not sure if I can comment on any of the suggestions. It all seems to be done right for me and I am happy to go with the suggested process.
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Re: A proposal for moving the Club forward in the coming year

Post by garindan » Mon Apr 11, 2016 7:30 pm

harinmenon wrote:Thanks for explaining this all very clearly. Apologies for my ignorance and limited knowledge about the markets, I am not sure if I can comment on any of the suggestions. It all seems to be done right for me and I am happy to go with the suggested process.
We are all here to learn, so hopefully things will gradually make sense as we go along. It is good to post like you have done, so well done for speaking up :thumbup:
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Re: A proposal for moving the Club forward in the coming year

Post by Beachboy » Wed Apr 13, 2016 5:34 am

Thanks for your proposal. Interesting reading and my initial thoughts are that I am generally positive towards all of them. I am going to be on holiday for 10 days now so probably will have limited chance to comment further until I return.
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Re: A proposal for moving the Club forward in the coming year

Post by garindan » Wed Apr 13, 2016 12:19 pm

More thoughts welcome! More members need to have a say.

Now it has been posted a few days some other considerations I had in my head:

- toyed with a recommended 3x dividend sell price instead of a single growth percentage

- we can have more long-term shares if the buying price is that good

- there could be different thresholds of course but are the ones I chose too high/low?
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Re: A proposal for moving the Club forward in the coming year

Post by garindan » Fri Apr 15, 2016 11:46 am

Still waiting for more thoughts on this proposal, especially from members of the Club. At the moment we seem to have 4 members plus myself thinking it sounds like a good proposal. There are still 13 members at large having said nothing about it yet. If I don't hear anything else by the end of the weekend I'll move forward with a poll as it is to see whether that progresses things, or not.
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