Stock Trading – Profit


I have previously written that I intend to keep stocks for 30-40 years, and I’m not going to sell the shares that I own. Over the last couple of months, I’ve started to change my mind on how I want to invest my money. I don’t think there is anything wrong with my initial strategy, I just think there are more optimal approaches to take. For example, if I were to keep £2,000 invested in each company within my portfolio for 30-40 years, the chances are that I would accrue substantial dividend payments and benefit from huge capital growth. The long term (20+ years) ‘buy and hold’ approach is not only successful, but it also requires very little time to maintain your portfolio. Once you’ve researched a company and bought shares in it, you can just leave it to grow and pay dividends.


Why would I choose to sell Shares?

My current strategy is designed to outperform the one above. Most shares will go through times where they’re undervalued and overvalued several times over and in this fluctuation lies opportunity. Take my recent purchase in Standard Chartered for example. I bought shares at 991p and their yield is currently over 5%. In 1-5 years time, the share price could increase to hit the previous high of 1940p (back in November 2010). As a result the yield could drop to 2.5%. At that point I would have nearly doubled my investment value and received dividends on the way. It’s not all great news though, my portfolio would be slightly out of balance with more money invested in Banks, and a company that makes most of it’s money outside of the UK. My New Strategy would allow me to either sell half of the shares and re-balance my portfolio to more normal level, or sell the entire holding. If I were to sell my entire holding I could buy two companies with the money. I would plan to purchase shares that I feel offer greater value than Standard Chartered – Companies that offer yields in excess of 4% and have scope to appreciate in share price. The process would then continue but this time I would have two companies instead of one. This would help spread the risk of the overall investment, and increase the chances for success.

To this end, I recently sold shares in Pearson PLC. I didn’t double my money, but I made a £209.48 profit from the sale (after commission and charges). I reinvested this money into the purchases of IG Group Holdings and Morrisons (Wm). The short reason to why I took this action was because I felt that Pearson was slightly overvalued and the other two companies were slightly undervalued. I might very well buy shares in Pearson in the future if their share price is at a level that I would consider once again ‘undervalued’, but for now, I believe my money will benefit more from being in these two companies. 


Total Income – 2014

When I add the profit made from this trade to the Dividend Income I’ve earned this year, my Total Income from stocks and shares for 2014 is £644.61. I normally buy shares in a company when I have around £1,200 capital. I’m really encouraged to see the Total Income is now over half of what I would use to invest with. I’m looking forward to the time when I can buy shares that I haven’t had to work for. I predict that I’ll be in position around May/June time next year. 

As of 4th November, I’ve contributed £16,079.53 of my own money (excluding dividends and trading profits) into buying shares, funds and bonds in 2014. The £644.61 I’ve earned so far represents a 4% return on investment. The 4% is a low end figure because if I didn’t invest anymore money for the next 6 months the dividends would keep coming in and my yield on cost would continue to grow. Some of my investments will take up to 6 months before I see any cash return.

I’ve decided to record the trade profit on my ‘Dividend Income’ page. I might change this if I end up trading more frequently, but for now it makes sense. I’m ultimately investing to earn money and I’m comfortable if that is made by dividends or trading. Dividends will be my bread and butter. They’re more reliable and predictable (to me anyway!). I don’t want to trade too frequently, and the foundation of my trades will be around putting my money in a place where it will work harder, NOT to make a quick buck!


What do you think about my change in approach? What are your thoughts on trading? Have you adopted a similar strategy? How has it worked for you? 



0 Comments

  • weenie

    Reply Reply 5th November 2014

    Hi Huw, all you've done is adapt your strategy according to opportunity (the opportunity being the £209.48 profit). Plans and strategies need to be flexible because things happen outside of your control and it's not as if you have totally abandoned your buy and hold strategy. I agree with you adding the profit to your dividend pot, it's all being used to reinvest, right? As you continue to research, you will no doubt see more opportunities like the Pearson one. Your decisions are informed ones based on ultimately increasing the size of your portfolio, so all part of your plan!

    6 months ago, I had never heard of P2P and never thought I'd own individual shares, yet now, they're part of my portfolio, part of my plan. I don't think there's anything wrong with changing minds! 🙂

  • Huw Davies

    Reply Reply 6th November 2014

    Hi Weenie,

    Thank you for your positivity and support. I agree with everything you said.

    I think it's important to be flexible, to try things, and to adapt in life. Consistency is also key in investing particularly and I want to make sure that my number one goal of making a regular, sustainable income isn't compromised by my trials. I do believe that this strategy will improve my income in the long run. I intend to reinvest all the profits I make from selling shares.

    Thank you for sharing your views!
    Huw

  • Hi Huw

    Just an observation on your revised strategy.

    It looks like you are intending to time your buys so you buy low and sell high, and while there is nothing wrong with this I have found that quite often I haven't bought shares because I though they were high only to see them continue to rise (Next is a specific example of this, years ago I thought they were too high at £15 per share, then a few years later they were too high at £30 per share, then some time later they were too high at £40, then £50. If I had actually bought at £15, not only would the value of my shares be currently over 4 times their starting value, I would now be receiving £1.29 per share in dividends for this year, which is 8.6% yield on the purchase costs (plus they paid £1.50 in special dividends).

    I have also bought shares because they had fallen and "surely they couldn't fall any lower", only to see them do just that (e.g Tesco!)

    I am not saying that you shouldn't adopt your new strategy, but just be aware that trying to time the market doesn't always work out too well.

    Best Wishes
    FI UK

  • Anonymous

    Reply Reply 6th November 2014

    Huw

    I fully understand your desire to go chasing the markets, however, I have seen over the past 30 plus years that I have been investing too many people fall by the side when trying to do this. Indeed I have succumbed to the temptation myself some years ago and it was the worst trade (gambling) decision I ever made.

    By all means try your new strategy but be very careful and don't get complacent after a few good trades because that is when the market will bite back hard. If you want to be financially free by forty I would stick to buying quality companies for the long haul. It might be boring but it works.

    Good luck

    Richard

  • Huw Davies

    Reply Reply 9th November 2014

    Hi FI UK,

    I hope you're well! Thank you for stopping by and passing on your thoughts.

    You bring up a great point, and it's something that I am aware of, and I want to ensure it remains with me. I want to buy quality companies, that will consistently pay increasing dividends year after year. I'm willing to wait for those companies to reduce in share value to a price I think is of good value. There's opportunity to be had from market speculation and performance updates. Although it's important to consider what the speculation and results say, I intend to make my decision on a wider range of information and historical data.

    Thank you for sharing your observation.

    All the best
    Huw

  • Huw Davies

    Reply Reply 9th November 2014

    Hi Richard,

    Thanks for sharing your views.

    I don't plan on chasing the markets, I just plan on buying companies when I view them as undervalued and sell them when they're overvalued. I want to avoid keeping a company forever if it crosses into one of these two extremes.

    My strategy is still based around long term holdings, as I feel it is one of the few predictable ways that will lead to success. I'm plenty happy with boring too. You just have to read my monthly income and expenses report to see how little I spend to enable myself to invest for the future.

    All the best
    Huw

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