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When to Top Slice

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
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Re: When to Top Slice

#273703

Postby scotia » December 28th, 2019, 12:47 pm

Dod101 wrote:Holding 50 shares is not diversification but diworsification. It is a fairly hamfisted way of going about avoiding the problem of one share dominating a portfolio.

Dod

That's an interesting observation - so is that advice to keep clear of ITs? Looking at Annual Reports, Alliance Trust It seems to have investments in well over 100 companies. Even Scottish Mortgage lists its top 30 companies as only making up 78% of its investments, with the remainder easily breaching the 50 total.

OK - getting back to the son's portfolio, I think it might be worthwhile if the son invests (either with new money, or with top sliced money) into a global collective. And this would give him a target to compare with his own investments. A world index ETF would make a good comparator, or a racier managed fund or IT (e.g. Fundsmith or Scottish Mortgage) might be more to his taste.

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Re: When to Top Slice

#273712

Postby Dod101 » December 28th, 2019, 1:28 pm

My typical trades would be a good deal more than £5000 for a start. Secondly I can normally trade without charge and Interactive Investor whom I use for free trades only charges about £10 per quarter, more for a SIPP. I would certainly be well under 1% per trade.

Dealing in larger amounts is an advantage of holding only about 30 shares in total and we have of course had this exchange before but I think that avoiding losses is a greater contributor to a portfolio's growth than finding a great winner. Anyway, the scattergun approach to investing is not for me.

Dod

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Re: When to Top Slice

#273716

Postby Dod101 » December 28th, 2019, 1:39 pm

scotia wrote:
Dod101 wrote:Holding 50 shares is not diversification but diworsification. It is a fairly hamfisted way of going about avoiding the problem of one share dominating a portfolio.

Dod

That's an interesting observation - so is that advice to keep clear of ITs? Looking at Annual Reports, Alliance Trust It seems to have investments in well over 100 companies. Even Scottish Mortgage lists its top 30 companies as only making up 78% of its investments, with the remainder easily breaching the 50 total.

OK - getting back to the son's portfolio, I think it might be worthwhile if the son invests (either with new money, or with top sliced money) into a global collective. And this would give him a target to compare with his own investments. A world index ETF would make a good comparator, or a racier managed fund or IT (e.g. Fundsmith or Scottish Mortgage) might be more to his taste.


I am glad you find my observation interesting. I was, as I think was probably clear in the context, writing about individual shareholdings. Obviously ITs and similar collectives have normally got a fair number of holdings but it may be worth noting that many of the most successful collectives hold only a very few shares. See Nick Train for instance and his management of Finsbury Growth and Trust.

I started investing in ITs and then branched out into individual shares but I was investing a fairly substantial lump sum off which I had to live for the rest of my life so I thought that an IT would be a good conservative investment to start with. For a young guy such as the OP's son, I think he would probably get bored with it very quickly and would not learn a lot anyway. At his age it is learning that he needs and taking risks is part of that process.

Dod

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Re: When to Top Slice

#273739

Postby scotia » December 28th, 2019, 3:11 pm

Dod101 wrote:
Dod101 wrote:Holding 50 shares is not diversification but diworsification. It is a fairly hamfisted way of going about avoiding the problem of one share dominating a
I am glad you find my observation interesting. I was, as I think was probably clear in the context, writing about individual shareholdings.
Dod

Interesting was a polite way of saying you are wrong. In any share market (e.g. FTSE 100) a small selection of shares may provide a better or worse (or the same) return as the average. Purchasing more increases the probability that you will close in on the average - and this may be an improvement, or a worsening (or no change) in your returns. Suggesting to a young investor that his returns can only worsen by widening the number of his investments is incorrect.
On the ITs which I chose to illustrate the diversification of professionals, I looked at Alliance and Scottish Mortgage simply because I had seen you make favourable comments on both of these recently.
And returning to our young investor, I would suggest that there is a significant amount of luck in selecting individual shares. Some professional investors have done significantly better than the market average, while others have done significantly worse - and at least one has achieved both, in different time periods.

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Re: When to Top Slice

#273740

Postby Dod101 » December 28th, 2019, 3:23 pm

scotia wrote:
Dod101 wrote:
Dod101 wrote:Holding 50 shares is not diversification but diworsification. It is a fairly hamfisted way of going about avoiding the problem of one share dominating a
I am glad you find my observation interesting. I was, as I think was probably clear in the context, writing about individual shareholdings.
Dod

Interesting was a polite way of saying you are wrong. In any share market (e.g. FTSE 100) a small selection of shares may provide a better or worse (or the same) return as the average. Purchasing more increases the probability that you will close in on the average - and this may be an improvement, or a worsening (or no change) in your returns. Suggesting to a young investor that his returns can only worsen by widening the number of his investments is incorrect.
On the ITs which I chose to illustrate the diversification of professionals, I looked at Alliance and Scottish Mortgage simply because I had seen you make favourable comments on both of these recently.
And returning to our young investor, I would suggest that there is a significant amount of luck in selecting individual shares. Some professional investors have done significantly better than the market average, while others have done significantly worse - and at least one has achieved both, in different time periods.


I assumed that you did not mean interesting in the normally accepted sense of that word. I hold and like (well I would not hold them if I did not like them) both Scottish Mortgage and Alliance. Fund managers for commercial operations like these and most other investment trusts are usually more concerned about not getting too far out of kilter with their competitors tan in taking risks to better them James Anderson of SMT is very unusual in holding strong and some might say idiosyncratic views and is certainly not a typical manager. Alliance is made up of about half dozen small portfolios plus a small company portfolio, which is where the largest number of their holdings lies I think. Certainly the main small portfolios are quite concentrated.

Dod

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Re: When to Top Slice

#273743

Postby Bubblesofearth » December 28th, 2019, 3:47 pm

Dod101 wrote:My typical trades would be a good deal more than £5000 for a start. Secondly I can normally trade without charge and Interactive Investor whom I use for free trades only charges about £10 per quarter, more for a SIPP. I would certainly be well under 1% per trade.

Dealing in larger amounts is an advantage of holding only about 30 shares in total and we have of course had this exchange before but I think that avoiding losses is a greater contributor to a portfolio's growth than finding a great winner. Anyway, the scattergun approach to investing is not for me.

Dod


Dealing in larger amounts is only an advantage if you trade. As I've said, start with enough shares and you hardly need to trade.

If I put £5000 into each of a range of shares and one goes bust I lose £5000. If one of the shares I choose goes on to rise 10-fold then I make £45,000. This is how markets evolve and it is critical in supporting portfolio growth. There are quite a few articles about this if you Google around the topic. Here is just one example;

https://www.forbes.com/sites/simonmoore ... 2de3386469

Because shares that go on to become big winners are relatively rare it is even more important to diversify widely (than if just trying to avoid losers) in order to capture some.

BoE

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Re: When to Top Slice

#273748

Postby johnhemming » December 28th, 2019, 4:17 pm

A good argument against diversification is that if you hold too many stocks you don't have enough time to study them. If you are going to do that you might as well use a fund.

My theory (which has worked out over time) is that the market has a tendency to over react both in pushing up a price of a stock and driving it down. I am of the view that by spending some time studying the nature of the listed securities that I can identify with some reliability (not 100%) where this is happening and hence benefit from contrarian positions.

In terms of the question as to when to top slice I have a view which is that if I think a stock is overvalued I should sell it. If I think a stock I hold has much further to go then I should continue to hold it. If I am not sure then I sell a proportion (ie topslice). It is moreso my certainty as to what is going to happen that causes me to top slice rather than sell.

At times I also hold an illiquid quantity of stock hence selling part of the holding is necessary if it is to be sold at a quiet time without moving the price against me.

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Re: When to Top Slice

#273751

Postby Bubblesofearth » December 28th, 2019, 4:27 pm

johnhemming wrote:A good argument against diversification is that if you hold too many stocks you don't have enough time to study them. If you are going to do that you might as well use a fund.



If you can gain an edge over the market by studying then congratulations because you are probably in an incredibly small minority. Most liquid stocks are researched to death by thousands of analysts every day. I gave up studying individual companies a long time ago and make the assumption that I am not able to beat the market in that fashion.

Funds do not offer equal weight on purchase combined with long-term buy-and-hold. Because that is the strategy I believe to be optimal I do not use funds. Also funds charge, although admittedly not much for some trackers. I would only consider funds for markets for which it is more difficult to buy individual shares, some developing markets for example.

BoE

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Re: When to Top Slice

#273754

Postby johnhemming » December 28th, 2019, 4:46 pm

Bubblesofearth wrote: Most liquid stocks are researched to death by thousands of analysts every day. I gave up studying individual companies a long time ago and make the assumption that I am not able to beat the market in that fashion.

A good example was the RBS US Dollar Alphabet soup that was discussed on TMF's banking board. The board identified that there were two categories of USD preference stock those which were must pay (debt) and those that where classed as equity where coupon payment stopped. It was, therefore, possible to make a capital gain by buying into the must pays and then when the rest of the market identified that those were being paid and the equity not swapping the capital into the equity type US preference shares so that when they also came up to par one had had two bites at this particular cherry.

One would start with the assumption that the TMF Banking Board were not the only people to spot this, but clearly notwithstanding the numbers of people whose paid job is research the market as a whole took some time to catch on.

The challenge, of course, is to manage to spot these sort of things without spending too much time doing research. I spend most of my working time nowadays on a tech startup which does various bits of software including tax software linked to the new Making Tax Digital thing. I don't, however, have a 9-5 working day, but instead arrange my working time (including research) around other things.

Another source of candidates for investment are companies that have lost the confidence of the market. That is not so much a rational research driven thing such as an emotional response.

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Re: When to Top Slice

#273757

Postby BobbyD » December 28th, 2019, 5:14 pm

scotia wrote:And returning to our young investor, I would suggest that there is a significant amount of luck in selecting individual shares. Some professional investors have done significantly better than the market average, while others have done significantly worse


It's almost as though in a game with no inherent advantage but a wide range of outcomes there will automatically be winners and losers ...and an ever growing graveyard of ex-investors whose losses removed them from the game and who are now quietly, and conveniently, forgotten about.

scotia wrote:- and at least one has achieved both, in different time periods.


The difference between a happy ending and a sad ending is where you choose to end the story.

Dod101 wrote:Obviously ITs and similar collectives have normally got a fair number of holdings but it may be worth noting that many of the most successful collectives hold only a very few shares. See Nick Train for instance and his management of Finsbury Growth and Trust.


Statistically you would expect this. You would also expect that many of the most disastrous collectives only held a small number of shares. It's not difficult to see why if you think about it.

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Re: When to Top Slice

#273769

Postby Bubblesofearth » December 28th, 2019, 6:23 pm

johnhemming wrote:A good example was the RBS US Dollar Alphabet soup that was discussed on TMF's banking board. The board identified that there were two categories of USD preference stock those which were must pay (debt) and those that where classed as equity where coupon payment stopped. It was, therefore, possible to make a capital gain by buying into the must pays and then when the rest of the market identified that those were being paid and the equity not swapping the capital into the equity type US preference shares so that when they also came up to par one had had two bites at this particular cherry.



Sorry but this is just hindsight (or if you prefer, survivor) bias. Same for all the very clever Soco investors that 'spotted' the potential. And another very successful AIM company investor that did very well for a while and attracted quite a following on TMF.

For every one of these 'success stories' there are plenty of failures. We just don't tend to hear so much from them so their stories don't get reinforced in the way the successful ones do. It's almost analogous to the victors writing history.

Of course these success stories were backed by clever arguments and research. Just as all the failures were at the time.

To demonstrate skill over luck you need consistency.

BoE

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Re: When to Top Slice

#273771

Postby johnhemming » December 28th, 2019, 6:30 pm

Bubblesofearth wrote: (or if you prefer, survivor) bias.

For every one of these 'success stories' there are plenty of failures.

To demonstrate skill over luck you need consistency.

All of that is true. However, I am only really interested in knowing what the truth is. Whether you agree with me or not is not a concern of mine.

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Re: When to Top Slice

#273773

Postby Bouleversee » December 28th, 2019, 6:43 pm

We are all different and can only do what suits us best individually. I am of the Bubbles variety and prefer a hands off approach and wide diversification. I do actually spend time first thing in the morning listening to the news and reading the financial pages but then I get overtaken by events and more often than not miss the boat as regards taking action and I am useless at understanding balance sheets and am a bit of a ditherer; the question of whether to sell all my utilities in case the Marxists got elected remained tossing in the air and has now been superseded by whether to get out of tobacco shares and whether to reduce my holdings in building shares as they may not do so well in future; PSN has performed brilliantly despite its PR disaster.

Dod and others are experienced investors with a business background but it is easier to lose money than make it and I don't think anyone starting out can hope to pick all the right shares. FWIW my IWeb ISA , which contains 70 holdings (do stop rolling around on the floor) and most of my money, produced a total return since Jan. 1 this year to Friday's close (with no cash added or taken out but quite a bit of dividend cash uninvested for fear of a Labour win) of 31.85% which is good enough for me and far better than last year. My Interactive ISA, started more recently, contains 18 shares and only produced l6.56% total return because, whatever anyone says, timing is everything and it contains several mining shares bought at the wrong time (mitigated to some extent by buying more in the other ISA when the price had fallen) and also several dogs, two of which will disappear shortly after being taken over for peanuts to join the ones which ceased to bark and were put down in previous years.

I haven't yet worked out what percentage of the total return was due to dividends and what to value appreciation but I certainly had a huge amount paid in, including several large specials, which compensated for the zero payouts of the dogs. My guess is that dividends won't be so generous next year. It would be interesting to know how much better the total returns are of those who go in for trimming and trading and unitising etc., which Doris hasn't got time for, and whether it is worth the effort. I certainly wouldn't bank on any youngster wanting to spend much time on it either so I think a good level of diversification, with little or no emphasis on HYP, is best to start with. One can always add to existing holdings rather than add new ones as the years go buy if they appear to be doing well. I haven't checked yet but my guess is that I will have again beaten the performance of the 2 fund/IT ISAs I took out years ago (never added to), which have been disappointing.

Returning to the topic heading, I suppose in a way I have been doing a bit of top-slicing my own p/fs over the years by using my cgt allowance to hive off partial holdings of my most successful certificated holdings first to children then to grandchildren, in bare trusts, which lowers the weighting in those shares in my own portfolio and spreads the risk between 7 of us now so if one holding came a cropper it wouldn't make too serious a dent individually. That is a long way off as far as the OP's son is concerned, however, so in the meantime in his shoes I wouldn't topslice because at his age the main concern will be growth rather than dividends but if he is prepared to watch the investments closely, he might consider selling all or half if it looks as though things are deteriorating or likely to deteriorate in any of his holdings. If he has enough spare time, he might like to experiment with keeping a dummy portfolio with the same shares and doing a bit of top-slicing to see how that works out compared with letting the winners run in the real one. As others have said, luck plays a huge part in stock market investing and he is unlikely to be lucky all the time. Good luck to him anyway; it's great that you have managed to get him interested.

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Re: When to Top Slice

#273780

Postby Dod101 » December 28th, 2019, 7:29 pm

Well done Bouleversee on that 31% return. I am, in my entire portfolio, looking at around 16% plus dividend income of probably around 6%. Also fine by me. More analysis on Wednesday and off topic so will say no more.

Dod

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Re: When to Top Slice

#273797

Postby YeeWo » December 28th, 2019, 10:17 pm

Dod101 wrote:Well done Bouleversee on that 31% return. I am, in my entire portfolio, looking at around 16% plus dividend income of probably around 6%. Also fine by me. More analysis on Wednesday and off topic so will say no more. Dod
Seconded, 31% is fantastic. I've just totted-up and as of last Friday 12.74% total YTD. I have IMB dividend on 31 Dec, so things aren't going to improve massively by 31/12, strangely I'm happy enough despite probably not beating a low-cost index tracker........

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Re: When to Top Slice

#273800

Postby Bouleversee » December 28th, 2019, 10:44 pm

I have quite a chunk of IMB in my IWeb ISA as well but whether the dividend will show on the 31st remains to be seen. Just as well they are in an Isa and pity I still have too many outside, exceeding the reduced allowance. New year resolution coming up.

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Re: When to Top Slice

#273801

Postby monabri » December 28th, 2019, 10:45 pm

31% beats the S&P500..a mere 29%.

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Re: When to Top Slice

#273802

Postby Bouleversee » December 28th, 2019, 10:47 pm

monabri wrote:31% beats the S&P500..a mere 29%.

Does that include dividends?

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Re: When to Top Slice

#273803

Postby 77ss » December 28th, 2019, 10:51 pm

Merkinglue wrote:....
The dividend return is pants (Around 0.2%) but his capital growth has been impressive, currently over 200%. This growth has skewed the balance as it now forms 12% of his savings, I think he needs to diversify.....


I ran into this issue when I first started investing. One purchase (SSE) did well, getting to over 10% of my holdings (and over 10% of my dividend income).

Top-slicing was one option, but I just chose to hold on and direct all new savings into different shares. The situation thus rectified itself in 2-3 years. It depends of course on whether your son is in a position to add much new money. One is, of course, accepting the risk that JD Sports may suffer a severe reverse in the near future - but that's investing for you.

Don't get me wrong; I am all in favour of regular top-slicing - if only to maintain the level of diversification one is comfortable with, but I think that it is a tactic more appropriate for those with largely built/fully built portfolios than for those still in the initial stages.

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Re: When to Top Slice

#273810

Postby Dod101 » December 29th, 2019, 8:26 am

If one is dedicated to strict rules like TJH then top slicing simply becomes part of portfolio management. As I understand him, he top slices to stay within his fairly strict rules to maintain portfolio balance. I do not have these rules and I tend to top slice only rarely, usually to try to maintain some sort of balance but also to capture an attractive 'peak' price in a share. Sometimes that works and sometimes not. For example Unilever was already easily my biggest holding and when it hit £50 earlier this year, I sold some. That was about its peak and it has since fallen back to around the £42/45 range so maybe a good call.

OTOH, I also sold some AstraZeneca (a much smaller holding) at £70. It is now £76/78 so there is no answer, just do what feels right at the time or probably more sensibly follow strict rules like TJH does (or do nothing, strictly hands off)

Dod


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