The Lemon Fool

Hi all,

So now I'm almost 5 years into this private investment game. So far, we have accumulated a fairly reasonable "second pension" and I'm personally hoping to be able to continue this effort for the next 5-10 years.

I've had some pretty good advice from many here over this past 5 years, and I wondered what you folks reckon to a strategy of mine which I partake of periodically.

Suppose I have a few "under-performers" or even just stocks whose fundamentals have been adversely affected by unforeseen events since the time that I first added them. A recent example being my Adidas shares which seemed fairly reasonable pre-covid, and then struggled to reassert themselves post-covid particularly with China's zero policy. They were then hit again by their silly decision to enter a partnership with Kanye West, and the ensuing fallout once the full extent of his anti-semitism (and general lunacy) came to light. The result being the termination of the partnership, a big loss in brand appeal and potentially a large amount of low value inventory to dump.

My policy with these under-performers is to dump them at points in time where the markets "seem" to be about to turn more negative, that is sell the baddies and at more or less the same time use the regained cash (admittedly after taking a 30-40% loss on the liquidation) to purchase (what I believe are) better shares - or least ones for which I have a better sentiment at the time. My view is that whilst both the bad share and good shares may well bounce back once the market turns good again, the ones with the stronger fundamentals will almost certainly pull back harder, and hence act as a proxy vehicle in recovering some of the loss encountered over the duration of holding out on the lemon share.

I'm wondering if anyone here pursues similar behaviour. It sounds like a no-brainer to me. My opinion is that this a slightly better way of "re-balancing" as opposed to mechanically re-balancing every N months based on an arbitrary "rule" found in an investment article. Perhaps I'm just fooling myself into a way of making myself feel better about the process of cutting losses. But having said that, if it works then do it, and for what it's worth a share with better fundamentals seems much more likely to make a stronger recovery, provided its business advantages remain.

thanks Matt

TheMotorcycleBoy wrote:My policy with these under-performers is to dump them at points in time where the markets "seem" to be about to turn more negative, that is sell the baddies and at more or less the same time use the regained cash (admittedly after taking a 30-40% loss on the liquidation) to purchase (what I believe are) better shares - or least ones for which I have a better sentiment at the time.

If tax-exposed, the losses may be a useful offset for CGT... you need to report them of course...

The alternative is to sit there and hope things improve.
Sometimes, that's what happens.
Sometimes, like my Cineworld shares, not.

It depends whether your new picks are actually better.
Otherwise you gradually crystallise a basket of losses which erodes your capital.

The idea is good.
Should be easier for me, primarily an income investor, I just look at the income flow.
Regards growth shares, the idea is as good as your stock picking, really.

V8

Depends on the exposure and the loss. Sometimes I just bite the bullet and they go, other times if it is one of my small punts (lke SONG) I bury my head in the sand until it is too late and then just hang on to them should I need to offset some CGT.

Paul

DrFfybes wrote:Depends on the exposure and the loss. Sometimes I just bite the bullet and they go, other times if it is one of my small punts (lke SONG) I bury my head in the sand until it is too late and then just hang on to them should I need to offset some CGT.

Paul

Thanks. We are in ISAs and SIPPs for the most part, so the CGT part is only relevant for my share awards from my employer.

I know the "head in the sand until too late feeling" a little. Fortunately as with your mention above it's mostly been in very small punts (Riot Blockchain, and Beyond Meat both ended at about -50% down) before the realisation dawns on you, that it you don't act fast you'll have nothing left!

You don't deflower your daffodils and nourish your weeds.

In general terms, I think there is a benefit from nourishing winners and getting rid of underperformers. If something turns out to be a dud, get rid (and define 'dud' carefully).

Doing this in practice is somewhat harder! (I'm currently looking at my Victrex.)

Best wishes


Mark.

ADrunkenMarcus wrote:You don't deflower your daffodils and nourish your weeds.

In general terms, I think there is a benefit from nourishing winners and getting rid of underperformers. If something turns out to be a dud, get rid (and define 'dud' carefully).

Doing this in practice is somewhat harder! (I'm currently looking at my Victrex.)

Best wishes


Mark.

Off topic: I'm holding VCT for now. I'm wondering if the market is downbeat on them as it's pricing geopolitical risk. I noticed that my JCGI retraced after a recent rise, after the incident with the balloon and now the Xi's mention of possible armament support for Russia.

ADrunkenMarcus wrote:You don't deflower your daffodils and nourish your weeds.

In general terms, I think there is a benefit from nourishing winners and getting rid of underperformers. If something turns out to be a dud, get rid (and define 'dud' carefully).

Doing this in practice is somewhat harder! (I'm currently looking at my Victrex.)

Best wishes


Mark.

Personally I do scalp at times. My NVDA holdings are up 65% with PE=135, and Federal reserve likely to make more rate rises. I'm standing ready to shave off about 15% of the holding v soon.

Matt

TheMotorcycleBoy wrote:
I've had some pretty good advice from many here over this past 5 years, and I wondered what you folks reckon to a strategy of mine which I partake of periodically.

It would be easier to comment on your strategy if you provided performance data.

Many people, on here and elsewhere, believe they know better than the market. It's an extraordinary claim in the sense that you not only have to be able to beat the market but do so after incurring dealing charges. Because that's basically what you are claiming if you believe you can predict which shares will do well (or continue to do well) and which will fall (or continue to fall).

If you do know better than the market then there are any number of strategies that will work. It would be interesting to know if yours has so far.

boE

TheMotorcycleBoy wrote:

ADrunkenMarcus wrote:You don't deflower your daffodils and nourish your weeds.

In general terms, I think there is a benefit from nourishing winners and getting rid of underperformers. If something turns out to be a dud, get rid (and define 'dud' carefully).

Doing this in practice is somewhat harder! (I'm currently looking at my Victrex.)

Best wishes


Mark.

Personally I do scalp at times. My NVDA holdings are up 65% with PE=135, and Federal reserve likely to make more rate rises. I'm standing ready to shave off about 15% of the holding v soon.

Matt

It’s tricky, isn’t it? If you have a holding with 135 PE then some trimming is justified IMHO .

I should’ve got rid PayPal when it was 80+ PE!

Best wishes


Mark

I am certainly not one who thinks he can beat the market. Getting rid of a loser is a good idea but do not make a habit of it because a buying high and selling low habit is the way to penury. We all do it occasionally of course. After five years you should be getting an idea of what works for you, and if you have a lot of 'losers' that you are selling you need to ask yourself why?

I might have a 'loser', that is one where I see no significant sign of recovery, once every couple of years or so although I have been guilty of hanging on too long and that can be disastrous. We are of course all different. I am primarily an income investor and long ago came to the conclusion that even if the share price was not doing much there was a fair chance that I would still get a dividend, and if the dividend was in doubt there are usually warning signs. I think my last really poor performer was B G China Growth which I sold at a loss at £3.16 a year ago but I have not looked recently to see if I have missed a bonanza. That is another thing. never dwell on a sale whether it was a good or bad decision.

If you can do as the title suggests you are on to a winning formula. If you can confidently 'reinvest in good', why bother with the bad performers at all?

Good luck

Dod

Dod101 wrote:I am certainly not one who thinks he can beat the market. Getting rid of a loser is a good idea but do not make a habit of it because a buying high and selling low habit is the way to penury. We all do it occasionally of course. After five years you should be getting an idea of what works for you, and if you have a lot of 'losers' that you are selling you need to ask yourself why?

I might have a 'loser', that is one where I see no significant sign of recovery, once every couple of years or so although I have been guilty of hanging on too long and that can be disastrous. We are of course all different. I am primarily an income investor and long ago came to the conclusion that even if the share price was not doing much there was a fair chance that I would still get a dividend, and if the dividend was in doubt there are usually warning signs. I think my last really poor performer was B G China Growth which I sold at a loss at £3.16 a year ago but I have not looked recently to see if I have missed a bonanza. That is another thing. never dwell on a sale whether it was a good or bad decision.

Indeed. There is no time for any emotions with investing.

My experience has so far taught me, both to try to make decisions based purely on a financial basis, and also to try accept that sometimes those decisions are poor, and to endeavour to learn from them.

If you can do as the title suggests you are on to a winning formula. If you can confidently 'reinvest in good', why bother with the bad performers at all?

If only it was so easy.

Matt

ADrunkenMarcus wrote:

TheMotorcycleBoy wrote:

ADrunkenMarcus wrote:You don't deflower your daffodils and nourish your weeds.

In general terms, I think there is a benefit from nourishing winners and getting rid of underperformers. If something turns out to be a dud, get rid (and define 'dud' carefully).

Doing this in practice is somewhat harder! (I'm currently looking at my Victrex.)

Best wishes


Mark.

Personally I do scalp at times. My NVDA holdings are up 65% with PE=135, and Federal reserve likely to make more rate rises. I'm standing ready to shave off about 15% of the holding v soon.

Matt

It’s tricky, isn’t it? If you have a holding with 135 PE then some trimming is justified IMHO .

I should’ve got rid PayPal when it was 80+ PE!

Best wishes


Mark

Well I did trim it by about 15%, at $237 per share. It's still holding roughly that right now even with the talking heads going crazy about more rate hikes.

I believe that it's up at 135x as they reported about 135% growth in their data center area. However their gaming sector has shrunk a bit from the lockdown days.

The thing about NVDA is that their SP is pretty volatile, so I'm prepared to buy back if there's a plunge. Their technology is great.

Matt

Bubblesofearth wrote:

TheMotorcycleBoy wrote:
I've had some pretty good advice from many here over this past 5 years, and I wondered what you folks reckon to a strategy of mine which I partake of periodically.

It would be easier to comment on your strategy if you provided performance data.

To be honest, when I said periodically I didn't mean "often".

If you do know better than the market then there are any number of strategies that will work. It would be interesting to know if yours has so far.

Hmm... hopefully it won't be that interesting! As I've just alluded in an earlier reply to Dod, the general idea is that there are zero bad performers. In that ideal world I wouldn't ever recourse to this.

Many people, on here and elsewhere, believe they know better than the market. It's an extraordinary claim in the .....

Definitely not me. A part of my portfolio is Fidelity's safe and boring MSCI World Equity Index tracker. Perhaps it all should be.

I read this book about Fischer Black (of options pricing fame) https://www.amazon.co.uk/Fischer-Black- ... 1118203569. He spent much of his career modelling different portfolios (alpha stocks, beta stocks and so on). He never really convinced himself that anyone could beat the market, despite attempting to formulate superior portfolio mixes.

TheMotorcycleBoy wrote:

If you can do as the title suggests you are on to a winning formula. If you can confidently 'reinvest in good', why bother with the bad performers at all?

If only it was so easy.

Matt

Well ‘twas you who said that. Of course it is not easy. Try to find a way of picking winners without the financial investigation. Everyone tries to do that . We amateurs have the advantage that we can use our own ideas and mine is simply assessing the culture of the target. How do they operate? Are they strategically long term or are they looking at next month’s results? Is the Annual Report filled with PR speak? Even stuff like how they make a change from one CEO to another. People scoff at these ‘soft’ measures but I think the culture is more important than worrying about margins , indebtedness and so on. Find a long term conservative company and you do not need to worry about the rest.

Dod

I'm thinking more and more that I'm a walking contradiction. As possibly others here are.

It's difficult to have these two points of view/behaviours at the similar points in one's investing life:

1. I accept that I can't beat the market
2. I'd like to be a successful investor and I stock-pick

Point 1. seems to contradict point 2. The only reason for stock picking (and acceptance of the overall market making superior returns) would appear to be the construction of an annuity alternative, i.e. a HYP. But presumably if one starts early enough a World Equity Index fund paying distributions would be seem a reasonable substitute.

Matt

TheMotorcycleBoy wrote:I'm thinking more and more that I'm a walking contradiction. As possibly others here are.

It's difficult to have these two points of view/behaviours at the similar points in one's investing life:

1. I accept that I can't beat the market
2. I'd like to be a successful investor and I stock-pick

Point 1. seems to contradict point 2. The only reason for stock picking (and acceptance of the overall market making superior returns) would appear to be the construction of an annuity alternative, i.e. a HYP. But presumably if one starts early enough a World Equity Index fund paying distributions would be seem a reasonable substitute.

Matt

You just need to be more fund manager and choose a different market!

I am about equal to an all world tracker over the lsat few years but ahead of any UK index.

doug2500 wrote:I am about equal to an all world tracker over the lsat few years but ahead of any UK index.

Ditto.

Best wishes


Mark.

doug2500 wrote:

TheMotorcycleBoy wrote:I'm thinking more and more that I'm a walking contradiction. As possibly others here are.

It's difficult to have these two points of view/behaviours at the similar points in one's investing life:

1. I accept that I can't beat the market
2. I'd like to be a successful investor and I stock-pick

Point 1. seems to contradict point 2. The only reason for stock picking (and acceptance of the overall market making superior returns) would appear to be the construction of an annuity alternative, i.e. a HYP. But presumably if one starts early enough a World Equity Index fund paying distributions would be seem a reasonable substitute.

Matt

You just need to be more fund manager and choose a different market!

I am about equal to an all world tracker over the lsat few years but ahead of any UK index.

That's incredible. When I unitise our portfolios each month I make a note of the value of Total return of FTSE100 (https://uk.investing.com/indices/ftse-1 ... rical-data) and of a few other indexes.

My notes reflect that the FTSE100 TR (https://uk.investing.com/indices/ftse-1 ... rical-data) has risen 9.18% between 26/2/22 and 25/2/23. So if your unit price has out performed the footsie 100 over that same interval then I think that you've done pretty well.

By comparision the SP500 TR (https://ycharts.com/indices/%5ESPXTR) has fallen by 7.9%. My unit price fell by 1.3%.

Matt

TheMotorcycleBoy wrote:

doug2500 wrote:

TheMotorcycleBoy wrote:I'm thinking more and more that I'm a walking contradiction. As possibly others here are.

It's difficult to have these two points of view/behaviours at the similar points in one's investing life:

1. I accept that I can't beat the market
2. I'd like to be a successful investor and I stock-pick

Point 1. seems to contradict point 2. The only reason for stock picking (and acceptance of the overall market making superior returns) would appear to be the construction of an annuity alternative, i.e. a HYP. But presumably if one starts early enough a World Equity Index fund paying distributions would be seem a reasonable substitute.

Matt

You just need to be more fund manager and choose a different market!

I am about equal to an all world tracker over the lsat few years but ahead of any UK index.

That's incredible. When I unitise our portfolios each month I make a note of the value of Total return of FTSE100 (https://uk.investing.com/indices/ftse-1 ... rical-data) and of a few other indexes.

My notes reflect that the FTSE100 TR (https://uk.investing.com/indices/ftse-1 ... rical-data) has risen 9.18% between 26/2/22 and 25/2/23. So if your unit price has out performed the footsie 100 over that same interval then I think that you've done pretty well.

By comparision the SP500 TR (https://ycharts.com/indices/%5ESPXTR) has fallen by 7.9%. My unit price fell by 1.3%.

Matt

You missed this bit:

"over the last few years"

Starting point makes all the difference. Since 2017 I outperformed very nicely. I underperformed by some margin in 2022 but am still ahead.

TheMotorcycleBoy wrote:I'm thinking more and more that I'm a walking contradiction. As possibly others here are.

It's difficult to have these two points of view/behaviours at the similar points in one's investing life:

1. I accept that I can't beat the market
2. I'd like to be a successful investor and I stock-pick

Point 1. seems to contradict point 2. The only reason for stock picking (and acceptance of the overall market making superior returns) would appear to be the construction of an annuity alternative, i.e. a HYP. But presumably if one starts early enough a World Equity Index fund paying distributions would be seem a reasonable substitute.

Matt

You may have seen my updates on changes in my portfolio which appear in the HYP Practical board. viewtopic.php?p=341678#p341678

My strategy is based on periodic rebalancing based on deviation from the median portfolio holding value. I set an upper limit of 1.5% of that median and reinvest accumulated cash based on rankings of holding yield and inverse weight. I also consider selling holdings completely if the yield on such a holding falls below about half the yield on the FT100 but this depends on my feelings about the share. Most recently I disposed of Marston's and Compass, principally to fund roof repairs.

You might find an approach like this useful. My objective is to maximize dividend income. Yours may be different. I use ordinary shares, you use accumulation units. The principal difference is that your dividends get reinvested in their source. Mine get reinvested according to my formula but moderated by weightings of income and weight levels. Just think about it.

TJH