Selling winners

When looking to raise cash to buy into a company I admire I often sell my winners as I don't like selling at a loss. But this goes against the wisdom of running with your winners and selling your losers.

BHP Billiton is the only stock in my mortgage portfolio that is still showing a profit! Therefore I was considering cashing in the gain to finance the purchase of Oracle shares. However having just scanned their most recent interim report I feel that rather than selling BLT I want more!

In the second half of 2008 BLT managed to increase its underlying profit by 25% and its cash flow by 75%! With a useful 4% dividend yield and on a very reasonable PE of 11 BLT has good prospects for steady share price growth, especially as oil prices recover and its petroleum projects start to come on line.

So Oracle with have to wait. This one is a keeper!

We have lift off

In the last couple of months something amazing happened. Some of my shares started to gain in value!

In fact it appears that after 18 months of haplessly buying small amounts of bank shares in the hope of getting in at the bottom I have finally managed it!

In February and March I bought some Barclays shares at an average price of 82p. These shares are now worth 280p a couple of months later! After months of banking pain a bit of banking pleasure!

It appears that the world is not about to end. And maybe some UK banks have a future.

So am I still buying Barclays? Yes - even though its PE ratio is approaching 5 - sky high for a bank these days!

So what companies are catching my eye these days?

Oracle looks like a great combination of growth and defense. Its database software is critical for IT solutions all over the world and is needed recession or not. It has a huge pile of cash, is buying back shares and is aiming to grow EPS at 20% at constant currency rates. All this on a PE of about 13? Gimme some now!

The only disadvantage is that being a defensive stock that has held up pretty well over the last year ORCL will not capture the full benefit of a market recovery. But I am an investor not a trader so that is a secondary consideration.

Happy investing!

The strong get stronger

Barclays released their 2008 results last week. And what a breath of fresh air they were! A bank making a profit - even after the write downs! EPS was 60p which puts Barclays on a PE of under 2!

Yes that is right. The PE of Barclays is under 2!

So if you have some money to save you can either get about 2% return in a savings account or you can get a 50% earnings yield if you buy BARC shares.

Is this the sort of mad Mr Market pricing that Warren Buffet loves to take advantage of?

Possibly but bank share prices have been dropping for so long it takes a strong conviction to start buying now.

Barclays are going to start paying dividends again in the second half of this year and this should give the share price a solid boost. They are going to start paying the dividends quarterly rather than twice yearly which will be better for income investors like me.

Barclays have been able to use their solvency to buy assets like Lehman Brothers at fire sale prices. This bodes well for the future when things eventually stabilise.

As for me, I am buying this one again while it stays below 200p. How often can you get a PE of 2 for a global multinational that is profitable and the government will not allow to collapse? Not that often is the answer!

I have seen the light

Finally I have seen the light!

Firstly, I have stopped buying UK banks! Although my theory that the government will not allow them to fail is correct, the banks can keep diluting my holding by issuing more shares to the government. The tax payer already owns 65% of RBS!

So enough is enough! All businesses are not created equal. In the good times banks can give a very nice return on equity but in the bad times they can easily go bust if they have not been managed cautiously enough. I am not selling my banks shares as they are barely worth anything anyway. They can hang around in case one day they are worth something.

Luckily the losses I have made have not been fatal. I am still in the early days of my investing career and have been taught a very vivid lesson about the importance of diversification.

The second revelation I have had is that portfolio ratios do work. If I had had a rule that 20% of my portfolio must be in cash then as the stocks in my portfolio fell I would have had to buy some more to maintain the 20% ratio. This would meant I would have picked up some cheap stocks on the way down. Then when (if!) stocks rose again I would be forced to sell some, locking in some profits.

Also if I had had a rule limiting me to 20% in one sector and 10% in one company then I would not have been so exposed to UK banks.

This is all pretty basic stuff that I had read a long time ago but it seems that I have to learn things the hard way.

Here is a sample collection of rules for a medium risk portfolio:

20% cash
No more than 20% in one sector
No more than 10% in one company
No more than 50% in US stocks.
No companies with a market cap. less than £1 billion

And here is an idea for a high risk portfolio:

10% cash
No more than 20% in one sector
No more than 20% in one company
No more than 50% in US stocks.
No companies with a market cap. less than £0.2 billion

And finally here is an idea for a high yield portfolio:

No cash
No more than 10% in one sector
No more than 10% in one company
No foreign stocks
No companies with a market cap. less than £5 billion

I have 4 portfolios in all: 1 high risk, 2 medium risk and 1 high yield.

Over the next year I will be slowly adjusting the portfolios to meet these rules. Any adjustments will be made at opportune moments in order to keep trading costs down.

My main portfolio is 40% in Genzyme! This obviously rather breaks the rule of no more than 10% in one company. So I will have to take some profits on that one. Oracle looks like a suitable parking place for the proceeds.

Best of luck!

Happy 2009!

Hello there!

After a few months off to pursue my career as a budding chess player it is now time to start think about securities again.

I was hoping that by now my bank shares would be on the rise and my faith in the UK banking system would be vindicated. Ha! Yesterday Barclays hit a new low amid fears that it would need a bailout from the government. And there I was thinking it had already been bailed out by Arabs.

The chart below demonstrates why I recommended UK bank stocks in summer 2007:


The only things I can say in my defence are that I didn't recommend Northern Rock and even Fred Goodwin didn't predict the extent of this crisis. Sir Fred is now undoubtedly licking his wounds on some sunny island whereas I would still like to see my bank shares worth something one day.

So am I still buying banking shares? Yes!

Stubbornness is a very bad quality for an investor. However I do have a theory.

If the banks collapse completely then so will the UK economy. Therefore the government cannot allow names like Barclays and RBS to disappear. It has already bought most of RBS and I guess will do the same for Barclays if it needs to. Therefore while there is still plenty of risk involved in buying banks like Barclays and RBS there is little chance of the shares becoming worthless.

I am only having occasional nibbles at Barclays anyway. The serious money is going into Tescos which will no doubt weather this crisis.

So I haven't given up on investing but I have been taught a very good lesson on the importance of diversification. Thankfully my main portfolio was reasonably diverse and thanks to Genzyme and the strengthening dollar that portfolio did no worse than the market last year. Considering that it contains RBS and HBOS that is a result!

A rest from stocks

I am having a bit of a rest from thinking about stocks and shares in August.

That is the beauty of being a long term investor. Occasionally you can just keep half an eye on the latest prices and not spend any time digging deeper. As long as you are invested in sound companies you can rest assured that they are not about to fall off a precipice financially speaking.

While I have been resting not much has changed. Banks have been bouncing around as normal and are still on ridiculous PE ratios. The news flow is still mainly bad.

Genzyme got a nice kick when Cramer recommended it. It is now showing a 30% gain over 18 months and is my biggest holding. I will not be selling. I still think that GENZ has an incredible risk reward ratio and is a great foundation for the rest of the portfolio.

I am still coveting Google, Apple and Oracle. These global brands all have a similarly great risk reward ratio and a fantastic balance sheet. They are stocks to be bought and not sold.

Happy holidays.

The chickens come home to roost

This time last year as the credit crunch was starting in earnest I was wondering what all the fuss was about. Now as the UK banks report their first half results the results of the dislocation are easy to see.

HBOS reported EPS down 52% when including various negative fair value adjustments to their assets. Not including these assets EPS was down 13% at 47p.

Using that 47p figure gives HBOS a 2008 PE of 3.5! And the directors guide for a stronger second half of 2008.

I believe that UK banks are very cheap here. Over the last four months I have been buying into Barclays and RBS on a monthly basis. My Barclays shares are now inching towards break even. The bottom may have been hit for the banks this summer.

It has been hard to keep buying banks when their price keeps falling and the news flow is terrible. However Warren Buffet's greatest investments were made by buying into companies that had suffered a temporary glitch such as GEICO when it almost went bankrupt in the 70s or Coke when it changed cola flavour in the 80s.

I believe this is a temporary glitch for the banks. The are making mountains of profit even now!

Lets review their position in 12 months time and see if I am right!