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Share trading is hard: Worked example

Share trading hamster

I was drinking with a friend last week when he congratulated me on my purchasing Lloyds shares.

Lloyds was up over 40% in just a few weeks. Result!

My friend had read about the initial trade on Monevator. Generally I don’t discuss share trades in real life because:

  • Share trading bores most people.
  • It’s extra pressure when the trade goes wrong.
  • You have to buy the drinks when a trade goes right.

Sure enough, my friend decided I could afford to buy him an extra round.

Stock picking is hard — as I’ve said before, you’re usually much better off investing through index trackers. (I do with much of my money.)

Adding peer pressure or social chit chat brings new awkwardness to a difficult task.

Even when your trades go right, you can delude yourself you’re doing much better than you really are — especially when your friends are congratulating you.

Let’s consider my Lloyds purchase to show what I mean.

Lloyds shares versus the index

I bought my Lloyds shares on June 30th for 72.3p. I paid more than anyone else in the market that day for my shares — not a great start!

The price soon started rising though. By the time I met my friend, Lloyds was over £1, reaching 105p on August 6th.

  • I was up 43% in five weeks!

Who could complain about that, eh?

Lloyds also did well compared to the UK’s main FTSE 100 index, which added 9.2% over the same period.

However nobody buys at peaks and troughs. Lloyds closed last night at 96.8p — a more modest rise of 34%. The index gain is still up about 9% over the period.

The snag: What did I sell to invest in Lloyds?

All sounds groovy — with 33% gains in five weeks, I should become a fund manager rather than just a private investor, right?

Not so fast, partner. Besides being very fortunate (I certainly didn’t expect Lloyds shares to move so quickly) I was also near fully-invested when I decided to put money into Lloyds.

This meant I had to sell shares to fund my Lloyds’ purchase.

For various reasons, I sold:

  • BT shares at 102.7p to raise £1,022.63.
  • SIG shares at 97p to raise £281.10.
  • Smith DS shares at 65.9p to raise £385.49.
  • GKN shares at 120.5p to raise £529.11.

If you’re thinking three of those are tiny, inefficient holdings, you’re right. My positions in SIG, Smith DS and GKN all began life as reasonably sensible-sized holdings worth north of £1,000 each. That’s what a bear market does to you!

Anyway, my sales generated £2,218.33, which I added to some spare dividend income I had lying about the account and then rolled into Lloyds.

Lloyds rose. And did nearly everything else

I couldn’t help noticing that almost the next day BT started flying up due to a turnaround in its seemingly cursed business unit. The other shares did well, too.

Here’s what my sold-off holdings would be worth as of last night:

  • BT: £1,352.39
  • SIG: £379.01
  • Smith DS: £530.91
  • GKN: £516.75

Total value: £2,779.06 — a gain of 25% on what I got for them.

  • Let’s say that again: By doing nothing at all, if I’d kept the shares they would have risen by 25% anyway, versus the 33% I actually gained from investing in Lloyds.

Hey ho: 8% is still a handy excess gain — except there’s also dealing costs and stamp duty on the Lloyds purchase to consider. These costs add up to £72.

Just looking at the money I reinvested in Lloyds (i.e. ignoring the extra dividend cash I put in), this brings my gain down to 28.7%.

The actual money result isn’t quite so bad since I added that extra cash, so the dealing costs as a percentage on the deal are in reality smaller.

Nevertheless, my heroic back-slapping trade has effectively yielded 28.7%, versus 25% if I’d done nothing.

And there’s more: I sold some Lloyds

My actual position is actually even less clear cut than the example above suggests.

As it happens I sold half my Lloyds shares, not wanting to be greedy. I locked in more of the gain than the shares are worth today by selling at 99.57p.

However, I rolled this (and other) money into a tech star I’ve long wanted to buy — a big holding in Autonomy.

As of today, my Autonomy holding has fallen about 4%.

I won’t work it out, but I suspect that’s enough to wipe out my locked-in gains from trading Lloyds, versus simply sticking with those four shares I sold, keeping my Mac switched off, and reading more books instead.

Conclusion: Share trading is hard

Let’s recap:

  • I bought shares in Lloyds Banking Group.
  • My trade was so well-timed that my friend was clinking his glass over it.
  • Yet in reality I’m barely ahead of doing nothing…
  • …or I’m doing even worse, given Autonomy’s share price drop.

I’m not going to judge my showing over a few weeks and one collection of trades.

This is a long-term game, and it’s very unusual for me to buy and sell shares as rapidly as this. In general, I prefer Buffett-esque masterly inactivity, even with the active side of my portfolio.

These are strange times, however, so even though I’ve stayed invested throughout the bear market, I’ve been much happier to chop and change positions than usual. (This flexibility with my holdings has definitely saved me significant money versus if I’d done nothing, as of today, anyway).

My point is it’s extremely easy to fool yourself when it comes to share trading.

My Lloyds trade could hardly have looked better at first blush. Yet in the end I think all I’ve done is followed a general rise in riskier assets, and saluted a big percentage win that in reality amounts to near-breakeven.

Darn!

Are you an active share trader? Do let us know how you’re getting on in the comments below.

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{ 4 comments… add one }
  • 1 Mike August 19, 2009, 10:54 am

    This is a great article. Actually I think you end up having to buy the drinks when the trade goes right or wrong… (-:

    Another extra wrinkle is of course that you also end up potentially paying capital gains tax as well … the shorter the hold the less CGT relief you get (as the bishop reputedly said to the actress).

    Also for fraidy-cats like myself that find volatile markets upsetting I will have typically used pound cost averaging to get in … so my trading costs even on index funds I reckon run to about 2%+ for an averaged-in portfolio of £75k for example.

    I bought into BT last year – and so am facing exactly the same decision on that that you faced on Lloyds…

  • 2 Rob Lewis August 20, 2009, 10:14 am

    Interesting story! I’ve not done much share dealing in the past (due to lack of funds), but I’ve had the odd dabble and learned a valuable lesson a few years ago buying some Marconi shares. Only a very small investment, thankfully.

    I’ve recently been looking at spread betting, intrigued by the way it works (actually quite simple), but I can see why gamblers can get hooked on it, it’s like a neverending horse race.

    My aim was to use it to generate £30-£50 per day, but I’ve only simulated so far, not committed any real money, and although I’m up, it does take a lot of work, which makes me wonder whether it’s worth the effort.

  • 3 The Investor August 21, 2009, 11:03 am

    Cheers for the comments guys, glad you liked the article.

    In terms of regrets I think it is Legal and General that is causing me the most post-sale pain. I stuck by it throughout the slump and waited in the recovery, but got spooked when it kept falling even while credit spreads narrowed and shares recovered and the savings ratio went up, all of which should have boosted its own position.

    Now it’s started shooting up after more than halving it’s dividend!

    Some critical indicator or threshold I’ve missed, or market contrariness?

    Ah well, if it were easy, etc etc. 😉

  • 4 Lee September 18, 2009, 12:32 am

    That was interesting to follow, thank you Investor. I guess the morals of the story are inaction isn’t always bad, and paper gains are not always as real as they first seem!

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