About Me

I am not a finance professional, I don’t have a finance degree nor have I ever worked in the industry but I do have an interest in the business world and particularly in trying to understand a company and how it makes money. I have been investing in the UK stock market since about 2009 after the Standard Life fund that I had all my meagre savings in took a dive during the financial crisis and I decided that if I was going to lose money I might as well do it myself. In hindsight it was a rather fortunate time to start investing given how the market has behaved since.

I feel I have come a long way in the last six years or so. I have been left holding three shares that went bust – HMV, ATH Resources and RSM Tenon (I lost quite a lot on that last one). Since then I have gradually managed to teach myself how to take a loss and stop myself losing my whole investment, which as a beginner was a surprisingly difficult thing to do. I managed to get out of a company called Shaft Sinkers before it went bust but I still left it too late and lost a lot. I also found myself getting caught up in the dodgy AIM listed Chinese stocks and lost a lot on Naibu.

Stop Loss

In order to make sure that I try and preserve as much of my capital as I can I have decided to instill a manual trailing stop loss of 16% on all of my shares. I do think having a stop loss is a very good idea but I decided not to set an automatic stop loss up with my broker because I noticed that some of the shares that I trade in do spike down quite a lot during the day and I didn’t want to be stopped out only for the share to come back a few hours later. Also, the automated stop loss doesn’t guarantee that I get out at the specified price if the shares are really tanking anyway. I only check my stop loss against the close price at the end of each day.

I have chosen a trailing stop loss which means that I check the close price at the end of the day against the highest price since the time of my purchase and sell if it has fallen 16% against that price. I chose 16% because I felt I could lose that much and not feel too bad about it and I read somewhere that the price of a share can sometimes be manipulated down to a certain point in order to purposely take out some automatic stop losses and people tend to place them on certain percentage falls – 10% or 15% typically so I thought that 16% might prevent this happening to me. I am not sure if there is any merit to this approach, however.

Advice

I absolutely do not give any share tips or financial advice of any kind. In this blog I will try and remember to state when I buy or sell shares and give my reasons behind my thinking – this is as much for my own learning as anything else so I can look back on my past decision, whether they were good ones or not, and see my reasoning. Please, please do your own research on any share that you are thinking of buying or selling and do not just rely on the opinion of others (especially me). Do feel free to add any comments below any of my articles, however, as I welcome both bullish and bearish points of view about each stock.

About my method

I read the latest annual report of all of the shares I look into along with the interim results and any other updates. I find there are certain things contained within the annual report that you do not get with the preliminary results for example. These include operating lease “liabilities”; director pay; splits within intangible assets (sometimes); splits within property, plant and equipment; trade and other payable splits; and trade and other receivable splits. All of these items can give important and useful information about a company so it is important to check them out in my view.

I try and analyse the income statement, statement of financial position and cash flow statement as I believe with a combination of all three, one can make a decent assessment of the performance of the company for that year. I have briefly outlined how I deal with each aspect below:

The income statement is probably the first port of call for most people when assessing a company. I try and understand the figures behind the numbers rather than just relying on “cost of sales” or “admin costs”. For example, how much of that was depreciation, how much operating lease costs, staff costs or amortisation. I find it rather frustrating that in the vast majority of cases, these costs are no allocated to either the admin costs or the cost of sales. Now, cost of sales only includes costs that are directly related to the process of selling the product/service so does that include staff costs, does it include deprecation or impairments? It seems that the answer is that it depends – in reality I suppose staff costs are split depending on the type of employee – back room staff or front line sales for example and likewise an impairment cost will depend on exactly what is being impaired. Usually it is not clear from the annual report so I allocate them as best I can, which in many cases is probably not totally accurate but gives me the best idea of the performance of the company.

The statement of financial position (balance sheet) is an important insight into the financial health of the company. It is where one can see all the assets and liabilities currently recognised for the group. As a general rule of thumb it is better to have a company that has positive net assets, although non-manufacturing companies tend to have much lighter asset bases. I tend to remove Goodwill from my calculations at least as this is not a real asset in my view – if it was worth anything, I would have expected it to be included under another intangible assets so all it represents is the premium a company has paid for an acquisition over its net asset value. I sometimes remove other intangible assets depending on whether I think whether they are worth anything or not. You will find that there is much more detail in the final accounts, as included in the annual report, than in the preliminary results, in particular receivables, payables, intangibles assets and property, plant and equipment.

If I had to make do with just one insight into a company’s performance, I would probably pick the cash flow report. From the cash flow statement we can see the underlying cash profit, and the operating cash flow after working capital movements along with capital expenditure, free cash flow and financing items such as new debt. If they wanted to, a company could manipulate earnings and profits but the cash flow cannot be manipulated in that way so there is another good point to the cash flow statement. Finally, there is no difference between the cash flow statement included in the preliminary results or the statement in the annual report. Obviously I like to see a positive cash flow but more important is a decent amount of free cash or the underlying cash profits.

There are other things that I look out for in the annual report. Operating leases in my view are quite important as these are uncancellable payments that need to be made on the leases but for some reason are not included on the balance sheet. I tend to consider them when I look at the debt a company has (along with deferred consideration) as these are real costs that a business will have to pay out in future. Clearly, the dividend yield is important too. A nice yield is, after all, what makes the difference between investing in a business and just simply betting on the future share price. I also like to look at the earnings per share and therefore the PE ratio. It is a bit of a blunt tool but the future forecasted PE ratio, in my view, is a decent way to determine whether the share is good value or not when all the other variables are taken into account.

I will attempt to keep a weekly diary of what I have bought, sold, written about and done which can be found here.

 

Current Portfolio

How am I doing now then?  Well, it has been a mixed bag – I have had three shares go bust but some others have done rather well and overall in 2015 I have made14%, the current(ish) list is below:

Share Blog

The individual share blog posts can be found here – share blog