Forum Archive Index - June 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Jefley,
 
>
> 
>I still have fbu and tel that are sliding around, and in a ranging
>market I would hold both until either my stop-loss, or strong chart
> signals yell sell.
> 
>Snoopy, i can imagine that you would say if the fundamentals were ok
>when i bought, and they have not changed, then i should hold, 
>
>


FBU and TEL are both companies paying a solid dividend yield.  You 
are right Jefley.   If I held those I wouldn't be selling.  But that 
is a pretty narrow portfolio you have there.   If it were me, I'd be 
using any uncertainty in the market to get into three or four more 
shares to complement those two holdings!


>
>
>but i'm not really a long-term investor and i 
>get very unhappy when my capital appears to erode.
>
> 



Or conversely you are only happy buying and holding when the shares 
you hold keep going up ad infinitum.  Get real!

If we look on the Stock Guru competition since January we can see 
that FBU is down 3.2% and TEL is down 5.79%.   As of last Friday, 
your capital *has* eroded!  No doubt about it!  From a long term 
investors point of view this indicates the folly in tying your 
entire sharemarket exposure to just two shares. 

Both FBU and TEL are what I would call 'income' rather than 
growth shares.  This means they will basically range trade. 

Lets take the specific example of Telecom.  I have indicated in 
another post that I believe it will probably range trade between 
$4.50 and $5.50.  I have no idea exactly when it will hit the bottom 
and top of that range, or even if it will.  I only know that 
statistically this is likely.

Let's take the traders approach and take the simple example of 
getting out of Telecom when it goes into a downtrend and buying back 
in when it goes into an uptrend.  You make two trades at a brokerage 
rate of 1.5% each (or 3% total).  Let's say the average price you 
traded at was $5 per share.  3% of this is 15c per share.  

If you get your trade right you might still do better than the buy 
and holder of course, as your capital gain will hopefully be greater. 
Or will it?
 
Let's say you executed the near perfect trade.  You wouldn't buy in 
right at the bottom ($4.50) or sell right at the top ($5.50) as you 
would have to wait for the uptrend and downtrends respectively to be 
confirmed.   Let's say you were buying in at $4.60 and selling at 
$5.40.  That is a profit of 80c-15c(brokerage) = 65c per share.  From 
this you must pay the tax man 33% of your capital profit.  This 
lowers your profit to 43c per share.  Of course, this is with perfect 
hindsight.  The  chance of any particular trade coming off, even for 
the best traders, is only around 60%.  This reduces your expected 
profit to 0.6 x 43c = 26c.

TEL pays 4 dividends per year.  The TEL trader may or may not be in 
for the dividend.  Let's say the share trader is just as likely to be 
in the market as out of it, which means they pick up half the 
dividends, or 10c per share.  Total expected trader profit is 
26+10=36c per share.

Now let's take the point of view of the long term investor.  If you 
have owned TEL for 10 years the share price has risen from an 
equivalent of around $2.20 to $5.  That is an average share price 
appreciation of 28c per year, and any capital gain is tax free.   
This is the expected increase in share price in the statistical sense 
if the long term trend continues.  A long term investor would pick up 
all the dividends, making an expected total profit of 28+20=48c per 
share.

This result shows the long term investor is likely to be better off 
than the trader.  Or more fully, the completely dumb long term 
investor who buys and holds no matter what is likely to be 25% better 
off than the very best of traders who executes the very best trade 
possible.

Moral of the story:  Trading income shares is a wealth hazard.  Don't 
do it Jefley!

SNOOPY








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