1        Introduction

Proshare run annual seminars at various locations across the country.  Dave Gaskell attended one held at the Majestic Hotel in Harrogate on Sunday April 22nd 2001.  It was attended by approximately 200 members of Proshare investment clubs.  The basic structure of the day is a series of presentations from guest speakers though there were a couple of panel sessions with questions from the floor.  There were a few breaks throughout the day and these gave good opportunity to meet with the other attendees.

My perception was that most of the attendees were relatively new to investing (by that I mean less experienced than our club) and most of the clubs  they were members of had been formed in the last couple of years (i.e. typically during the ‘boom’ of 1999).  In the various conversations I had with other attendees it was quite apparent that our club is much more disciplined in its approach than most clubs.  Most of the general thrust of the presentations seemed to assume this too as they emphasised the merits of a controlled approach to investing.  It was stressed, though, that the best clubs were fun to be part of and the fun and education side of being a club member were more important than than making money (though if you made money it was even better!).

Overall, I thought the day was informative and quite entertaining and I think that we should try to get at least one member to attend one of the seminars each year……..especially if I can tap my old friend Jan up for free tickets again!

Below are notes that I took during each of the presentations.  The slides associated with the presentations are allegedly on the Proshare website (though I couldn’t find them) and there were a number of handouts (though these were mainly marketing blurb from the various companies present so I’ve binned most of it). 

2        Mike Heathfield, Sandstormers Investment Club

Opened his talk by saying that the earliest piece of advice he was ever given was to read the FT because what it says is true.  He held up a cutting from an FT which he said was a medical report saying that in any 30 minute financial presentation, 70% of the audience will daydream about a sexual fantasy………he was therefore delighted that his half-hour talk would bring so much pleasure to so many people!

Main points:-

Share selection

·                Research, research, research.   Uses UK-Invest (good editorials), Hemscott, Company Refs and FT Marketwatch

·                Strategy involves trying to find undervalued stocks and expecting them to realise value within 2 years

·                His club doesn’t aim to sell within 2 months but deliberately doesn’t have a long-term buy and hold approach it’s more fun to research and buy different shares

·                They aim to spend approximately £2k per purchase and certainly don’t spend less than £1k on any purchase

Reasons to Sell

·                When original story changes has found it best to always get out. Have a stop-loss review at 15% but this is not a rigid sell condition….just a review

·                When the prospective PE becomes excessive

·                On the momentum/volume chart pattern (ignoring low volume price changes)

·                When price has  reached 20% higher than the 200 day moving average (which seems to be a fairly accurate resistance level)

·                When buying something better

Lessons since starting the club

·                Follow market trends

·                Cash can be good – especially good to keep some for funding future purchases

·                Volatility = opportunity

·                Have a share champion responsible for active monitoring

·                Provide for urgent decisions (i.e. don’t rely on meetings for sell decisions)

·                Purchase some software to help the treasurer keep track of accounts etc. (like COW2000)

·                Subscribe to Company REFS

·                Use Hemscott.net

·                Run a Fantasy competition to track prospects.  Run it for 3-6 months only to keep interest in it and do it with people having to pick from a shortlist of (say) 30 shares that the club wants to follow

3        Belinda Greaves, Digitallook : Risk

RiskMetrics is a company that grades each company daily on a risk grade. RiskMetrics supply to 5000 leading financial companies and banks with information about risk.  They are backed by JP Morgan, Reuters, Intel, Deutch Bank and a few others.  Digitallook.com has a global partnership with RiskMetrics  for delivering risk grades to users.

Digitallook aggregates  information from over 100 data sources and has links to the risk grade of each company from that company’s details page within Digitallook.

Risk grades are on a scale from 0 being extremely low risk, up to more than 400 (there is no absolute maximum) for very high risk investments.  The risk grade is calculated based on various factors such as sector, recent price movement, news, staffing, currency impact, etc.  The same grade scale is applicable across multiple investment vehicles so it is a good way of comparing the relative risk between different sorts of investments. 

At the time of the presentation (April 2001), Cash had a risk grade of 0, FTSE Tracker fund a grade of 110, Vodafone 300, Baltimore 380 and Huntington Life Sciences 1689!!

The biggest changes of risk grade between January 2001 and April 2001 been Huntington Life Sciences up 238% to 1689, Iceland up 178% to 302, C&W up 48% to 463, Marconi up 43% to 439, and Mothercare down 39% to 208.

Try to consider the level of risk that you are comfortable with as  an investor and built it into your stock selection techniques. 

You can monitor the risk of your portfolio and try to set a risk tolerance that can be used as a sell trigger (or at least a sell review trigger) in the same way as a stop loss might be used.  Riskgrades.com allow you to set up portfolios that can be graded either on the basis of each of the constituents of the portfolio, or as the portfolio as a whole (which will typically be lower due to the fact that having multiple constituents within a portfolio introduces diversification which reduces the overall risk).

Riskgrades.com also have an excellent on-line course on risk tolerance and a couple of very technically detailed documents explaining how the riskgrade is calculated.

4        Terry Bond – Research to Better Structure Your Portfolio

Key points

·                The number of shares in your club’s portfolio should be based on the number of people in your club

·                Put a classroom session into your club’s meeting agenda – 1 person briefly explaining something they know … or even something they don’t currently know but which they can find out about between meetings and brief the others

·                The amateur club has ill-assorted shares, half-remembered reasons for buying, no rules for selling

·                Successful clubs have

·              A philosophy – strong base (e.g. 70%) of proven shares, invest regularly and reinvest dividends, diversify in sector and in company size

·              A system – have a waiting list, recommendation/proposal sheet, a rolling stop-loss policy, a ‘check-profit’ policy (where the stop-loss is tightened to lock in more profit), set a target price when buying to know what price you’re expecting the shares to go

·              A method – keep it simple, get all club members involved, those who know should teach, and research research research

·                Look for and understand any reasons NOT to buy so you’re aware of it’s weaknesses and it’s exposures (borrowings, court cases, unsecured patents, currency exposure, poor order book, etc.)  and, if you still decide to buy, you are going in with your eyes open

·                The company’s management is the most important feature.  Ideally, the CEO should be someone that has worked their way up and knows the business.  The FD is the one that should understand the City so check his/her history

·                Check that remuneration and bonuses are in line with company performance

·                Check that directors have good holdings in the company or at least understand why they haven’t

·                Look for 5 year histories of turnover, profit, earnings, dividends all increasing

·                Examine price graph and ask company about any blips

·                Check income streams and especially try to identify where one income stream subsidises other streams

·                Talk to the company’s customers to see what they think

·                Talk to the company’s suppliers too – are they happy to have them as customers, are they impressed with them as customers, etc.

5        Donna Okel, The Analyst magazine

The Analyst is committed to “Business Perspective Investment” inspired by Warren Buffett. 

Three key steps are:-

·                Stop speculating and be patient (invest in businesses, don’t speculate in share prices)

·                Stop thinking about the stock market (understand the value of the business you are investing in rather than just its share price)

·                Understand what you mean by business (businesses need to generate cash – that’s the purpose of a business)

Criteria for selecting a share should be the same as selecting a business.  Think about 100% ownership and never having to sell – if you wouldn’t buy the business then why buy shares in it.

Be confident that the business you’re about to invest in is a good business.  There are 10 basic differences between a good and a bad company

·                Simplicity

·                Growing

·                Above average profits

·                Generates cash

·                Predictable

·                Good track record

·                Light on physical assets

·                Pricing power

·                Proprietary products and/or services

·                Focussed management

You should be able to give a 2 minute summary of any company within your portfolio to anyone that asks.  This will demonstrate that you understand what you’ve bought and that the business is simple enough to explain.

Risk and reward are not market price based they are economic value based.  Buy more in value than you pay for in price.  A bad business isn’t worth buying at any price.  Don’t sacrifice long term super-performance because of short-term market fluctuations.

6        Deirdre Lo, iTruffle

ITruffle is a small caps specialist to help give information about smaller companies to investors. 

On average, companies outside the FTSE 350 only each get mentioned twice per year – this underexposure can result in many companies being undervalued despite being very sound and robust companies. 

Ideally want to understand what the size and growth potential is of the company’s market.

The ‘beta’ indicates the correlation between the share price and the underlying market trend.  Low beta indicates little correlation, negative beta indicates that the share price is moving against the trend.  Small caps tend to have low betas as they are less exposed to ‘global’ events and less vulnerable to institutional money flow.

In gathering information for the iTruffle database, they’ve tracked the share prices based on the anecdotal evidence of how open the company was in providing information and there is a good correlation.  Try to make contact with companies and assess their openness/honesty of management for yourselves.

ITruffle has an advanced seach facility on their website allowing filters on up to 14 criteria.  A suggested model for selecting a small cap company is:-

·                The Business

·              What market is the company in

·              What is the size and growth potential of that market

·              How does the company’s products and services fit into the industry

·              What are they key growth drivers

·              Who are its customers

·              Who are its competitors

·              What is the strategic value of the company’s business / assets

·                The Management

·              Who is the Executive Management

·              What relevant experience have they got

·              Will they leave the business prematurely

·              Is the senior management convincing

·              How is the senior management incentivised

·              Do they have a stake in the business and how large is that stake

·                The Financials

·              Historical performance – make sure the financial periods are comparable and strip out exceptionals, acquisitions and disposals to ascertain the underlying trends

·              Post restructuring / acquisition / disposal – have the benefits materialised – what’s the risk that they may not materialise

·              Future expectations – what does the growth depend on and is it realistic (e.g. currency exposure, interest rates, single contract renewals, etc.)

·              Look at all 3 sections of the annual report…..profit and loss statement, the balance sheet, and cash flow

·              Read the notes to the accounts

·              Compare with its peers – start with the sector peers

·                The Markets

·              Does the company have access to capital to grow – look at the management’s profile, the company’s profile, the sector assessment, track record with previous funds raised – it is likely to be able to get additional funds

·              Valuation relative to its peers

·              Who are its largest shareholders

·              Analyst following or fund management following

·              Is there an ‘overhang’ which depresses the share price (e.g. either a single large shareholder which poses a threat of sale OR a lock-in period with investor company incubators that could end soon

The website helps provide a lot of this information and live interviews and recordings of interviews with CEOs.  Private investors are encouraged to join in the live interviews.

7        Mike Wellings, EO UK

EO (via www.EO.net) gives investment clubs opportunities to participate in new issues and flotations.  Historically, few flotations have been open to retail investors – mainly limited to institutions.

EO aggregates the supply and demand to make it easier for the investment banking community to deal with retail investors.  The investment banks behind new issues and flotations would much rather deal with a few larger investors than many smaller investors.  EO can aggregate demands from smaller investors and present these as a single demand to the investment banks.

Registration on the website is free and EO charges no commission and no stamp duty which is just the same as for institutional investors into new issues.

8        Investment Club Panel

Dick ???  (I didn’t catch his surname), Elizabeth Swallocs Investment Club

Formed in 1994 and claim to have made every mistake there is to make!!

Had heavy losses in the first couple of years so plugged FTSE100 stocks into their portfolio which gave immediate stability and gave time for the club to think. 

Lessons they’ve learnt are:-

·                Get your admin in place and get software in place to help your club - especially the treasurer

·                Avoid tipsheets – remember that if it’s in the tipsheet then you can guarantee that the City will have crawled over it days before you see the tip

·                Use company REFs to identify shares.  It might seem expensive but they consider it very cheap as it avoids them making nasty mistakes.  They apply mechanical criteria against CD Refs to arrive at a shortlist (using things like PEG <0.8, cash flow v eps >1.5, etc.)

·                Just aim to get more correct decisions than wrong ones

·                Selling: use a 90 day moving average and if the price goes through it then it is on the ‘alert list’.  Also put stocks on the ‘alert list’ if a 20% trailing stop-loss is breached.  They review the holdings of all companies on the alert list at each meeting

Mark Goodman, Horse & Groom (H&G), Brass Monkeys, and Dirty Harry’s Investment Clubs

Formed H&G in 1994 as a group of mainly novices

Started getting involved in press and got fan mail and people asking to join the club.

Soon reached the maximum of 20 members so decided to start another club but set a 5 year commitment on this club.  That is, rather than being open-ended like the H&G one, they agreed to run the club for exactly 5 years and then close the club – nobody being allowed to withdraw any funds until the 5 years was up.

The social side of the club and the learning side are very important.  They put education first, social second and money third.  They have an annual summer bbq and a Christmas event and even open both these up to other clubs in the area and they are very well attended.  The fun side is important to keeping the club together.

A key benefit of the learning side is evidenced by how many of the members now have their own private portfolios

Panel - Seven suggestions from successful clubs

1.     Start meetings promptly and impose fines for lateness or for non-attendance without apologies.  Make good use of the attendees time by sticking to the agenda

2.     Try to generate a rolling shortlist of stocks for consideration with the size of the list being approximately two stocks per member of the club.  Then get people to pair up and research one of the list for each pair and/or to generate additional changes to the watchlist

3.     Run fantasy competitions but with relatively short timeframes (3-6 months) to prevent boredom/apathy setting in.  Try to link the fantasy competition to the watchlist of the club (e.g. by only allowing selections from the club’s shortlist)

4.     Be disciplined but not at the expense of having fun.  Have a portfolio management strategy and ‘research research research’.  Set guidelines for selling.

5.     Have a champion for each share in your portfolio and report progress each meeting or more frequently as appropriate

6.     Have teaching sessions at each meeting so that learning is a feature of each club meeting – even if it means getting someone to research a topic and report back rather than someone simply describing what they know already (though this can be useful in the short term).  Consider inviting guest speakers too or reviewing books etc or courses/seminars

7.     If people aren’t already settled on information sources then spread them out across the club membership (e.g. bulletin boards, websites, magazines, papers, CD Refs, etc.)