Introduction
THE PREVIOUS CHAPTERS have provided all the information needed to successfully run a long-only stocks and shares portfolio. It has outlined how to research shares to ensure their high quality and value, how to time share purchases, when to sell and how to manage your portfolio effectively.
This chapter discusses the day-to-day running of the system and how I apply it to the share portfolios I control. It is hoped that this will help you gain an improved understanding of how you could run your own portfolio.
Weekly routine
Saturday
My weekly investing routine starts early on Saturday morning.
Review current holdings (20 minutes)
I start by reviewing current holdings in the portfolio. I look at the closing share price for each company and compare it to the assigned stop loss (determined in chapter 14).
If the end of week closing price is below the assigned stop loss, the holding will be sold Monday morning. If the closing price has risen, I check to see if the stop loss should be raised to lock in profit (again, using the rules outlined in chapter 14). Where the closing share price for a company is above but close to the stop loss, this is noted and monitored closely over the following week.
Market and sector direction (20 minutes)
The next step is to look at where the market is in the price cycle. If the underlying market is in a strong, stage 4 downtrend (as described in chapter 13), no further investment in the market will be made until the trend starts to move sideways (forming a stage 1 bottom) or until the price starts to trend upwards (moving into a stage 2 recovery phase). It is also useful to note key support and resistance levels, which can help to identify potential price levels where markets tend to reverse.
If the price cycle is not in a stage 4 downtrend, a look at the underlying price direction of the market sector is then undertaken. This helps to identify which sectors are performing poorly and which are doing well. Sectors that exhibit strong downtrends in overall price are out of favour and should be avoided until improving price momentum is evident.
Conversely, sectors that exhibit strong uptrends in overall price and have positive price momentum across the sector are in favour. This should be supportive of share prices for companies in the sector, provided valuation metrics don’t look too stretched. When researching companies, I try to focus on those that lie in sectors with positive price momentum, as this can offer short-term uplift to company share prices. This means that investments tend to move into profit quicker than they might otherwise do.
In addition to identifying new companies to research and invest in, I look closely at companies that have already been invested in which lie in poorly performing sectors. Such a downturn may signal a change in fundamental drivers which will hamper performance of companies in the sector. This warrants further investigation into the underlying cause of the decline and research into whether the fundamentals have deteriorated enough to trigger a sale of company shares in the sector.
Screening for stocks (30 minutes)
On the last Saturday of the month, I re-run the stock screens outlined in chapter 2. Watch lists for income, value and growth shares are created. These companies remain the focus of research for the month.
For income and value companies, I use an adjusted income summary sheet (see figure 16.1) which allows me to sort the companies by stock rank while having key information on income displayed.
The stock rank combines momentum, quality and value characteristics to provide a composite score that reflects their rank against the universe of shares. This helps provide the order to research new companies in detail, as companies with a higher stock rank have a higher likelihood of medium-term capital appreciation (i.e., share price rises). I look to research one or two companies each week from this list.
Figure 16.1 Income watch list on Stockopedia’s portfolio section
In addition to researching companies currently on the screen, I take note of companies that were bought and have subsequently come off the previous month’s watch list. I try to understand why a company is no longer on the watch list and research whether the fundamentals of the company have changed. If the fundamentals have deteriorated, I may look to tighten the stop or sell my holding in the company.
I perform a similar analysis for growth companies. In this case, I use the quality summary to sort companies by quality rank (see figure 16.2). This combines factors reflecting quality (such as profitability, cash flow and stability) to rank companies in the market universe, assigning a score between 0 and 100 with a higher score indicating a higher level of quality.
Companies with higher quality scores are given priority for research. The reason behind this is that investing in high-quality companies with high earnings growth is normally preferable to investing in high-growth companies that are of low quality. In addition, high-quality companies are more likely to pass the fundamental number checks.
Figure 16.2 Growth watch list on Stockopedia’s portfolio section
Sunday
Reading and research – Financial news (less than two hours)
On Sunday morning, I read the Sunday papers and news wires. The newspapers I look through include the Financial Times, the Telegraph, the Sunday Times and The Economist.
I focus on the broader economics and relevant company news. In particular, I look for information that is either directly applicable to the companies owned in the portfolio or companies that may eventually be bought. Related sector information and articles about competitors are also of interest. This helps keep me up-to-date with current market sentiment as well as form a forward-looking view.
Identify company shares to potentially buy (30 minutes)
Companies that have already been researched and are a buy based on fundamentals and valuation go on the shortlist. Weekly and daily share price charts are reviewed on Sunday and the chart strategies are applied to look for potential entry points. This helps identify which company shares are setting up for purchase and should be closely monitored (and possibly bought) during the following week.
Company research (less than three hours)
On Sunday evening, a few hours are spent researching new companies from the watch list. If cash is available in the ISA account (i.e., tax-free account), the focus will be on finding new income or value companies to invest in. If ISA cash has been fully invested, my focus will turn to growth companies and how to invest available cash in my trading account.
As mentioned previously, research should be guided by stock ranking for income and value companies and quality ranking for growth companies; I select the highest ranked company on the watch list to research first.
Often research is not completed in one sitting and further research is undertaken during the week (if time allows) or the following weekend. If the company is determined to be a potential buy, it is added to the shortlist for further monitoring.
Monday to Friday
Stop losses (less than 30 minutes)
The first priority of the morning is to sell company shares that have hit their stop losses. This is normally done at 9.30am, after the stock market has been open for an hour. If the company share price is still below the stop level, the shares are sold immediately. If the price has moved above the stop level, the shares are monitored throughout the day and sold only if they again fall below the stop level.
Company share prices that were identified as being close to their stop losses are monitored during the day, with price checks at lunchtime and half an hour before the market closes (at a minimum). The TradingViews website (tradingview.com) has a stock alert feature that can send an email message when the current price falls below designated stop levels. This is used for every holding in the portfolio and is an effective way to ensure everything is tracked while I am away from the computer screen.
Financial news and magazines (30 minutes)
Lunchtime usually affords an opportunity to spend half an hour reading financial news. Looking over the markets section of the Financial Times provides a good overview of what markets are focusing on the short term, as well as the latest economic news to have a bearing on market direction. However, the companies’ section is my favourite as it is easy to skim through to find news on holdings and companies of interest.
End-of-day review (one hour)
In the evening I review technical charts for shortlisted companies looking for the next day’s set-ups (which provide opportunities to purchase company shares). I also take note of companies that are below their stop loss as well as share prices that are approaching their stop loss and need to be monitored the following day.
End-of-quarter routine
On the last weekend of the quarter I take a couple of hours to review the portfolio. This involves taking note of the current holdings, total cash in the accounts and dividends that have been paid into the account over the quarter. The holdings and cash positions are recorded in a spreadsheet.
The final thing I do is calculate the total value of the portfolio. I record this in a spreadsheet so that I can see how the portfolio value has changed over time. This allows me to keep track of portfolio performance and calculate the total returns being made.
Yearly routine
I normally take two weeks at the end of March, to coincide with the end of the accounting year, to do an extensive review of the portfolio and its holdings. I review each company in the portfolio and refresh the research undertaken previously. I check my investment thesis and ensure that the reasons for investing in each company are still valid.
This helps to tidy the portfolio as it prompts the selling companies that are performing poorly (using the qualitative selling rules in chapter 14). Also identified are companies that are performing well which may be candidates for further investment.
Conclusion
I hope this book has been informative and has inspired you to manage your own portfolio of shares. Discussion of my routine shows that it takes time to monitor and maintain a portfolio, as well as stay up-to-date with events in the market and generate new ideas for the portfolio’s continued development. However, I recognise that many people might not have the time nor the inclination to spend managing a portfolio.
In this case, the supporting website (www.theequityedge.com) provides useful content to help implement the system. Similarly, the newsletter subscription service provides the necessary information to carry out the approach outlined, such as analysis of companies, complete watch lists and discussion of real portfolios being managed. The information should significantly reduce the time needed to successfully manage a portfolio.
Even if you do have the time to complete the necessary analysis and management of the portfolio, you may still find it useful to have a subscription. This is so that you can compare your own analysis to that undertaken by myself and others, which will allow you to build your expertise with confidence.