Diary of a Private Investor: how the pros make money from turbulence

Diary of a Private Investor: how the pros make money from turbulence

Unfortunately there is no foolproof system to deal with these sort of situations. When a panic occurs, it is usually right to buy.

By James Bartholomew
Published: 9:49AM BST 27 May 2010


What a daunting few weeks this has been in the stock market. In normal times, one or two worries present themselves. Recently they have had to form a queue.

It was bad enough when we were just worrying about Greece and its budget deficit. One of the scary numbers I came across was that German financial institutions hold $37bn in Greek bonds. That, I presume, is not counting money lent in forms other than bonds. If Greece defaulted, some major German banks would take a big hit. Think through all the consequences of that and you get to higher lending costs around Europe and renewed recession.

My shares quoted in Hong Kong were probably not too worried about that but they spiralled down for a different reason. China has tightened lending to quieten down property prices. And what are my biggest holdings in that area? Why, property companies of course.

Back home, growing anguish about the coalition government's apparent aim to tax capital gains more heavily in future is encouraging people to sell sooner rather than later. On Friday last week, I myself sold some Healthcare Locums (at 223p) held by one of my children to use up the tax free allowance under the current rules. The fear must be that many people will decide not to reinvest after selling if the new regime is harsh.

Then came news that the North Korean dictator has taken it into his head to prepare for war. Next came a crisis among Spanish banks. For those of us who are pretty fully invested, the bad news has been relentless. It has been like the charge of the light brigade: "Cannon to the right of them, cannon to the left of them, cannon in front of them … into the mouth of hell rode the six hundred"

Unfortunately there is no foolproof system to deal with these sort of situations. When a panic occurs, it is usually right to buy. But sometimes it is better to get out because the fears will turn out to be justified. As concerns about an uprising in Russia increased in 1917, I expect prices of Tsarist bonds fell back. It probably looked clever to buy on the dip. Unfortunately, as it turned out, when the communists took over, the bonds lost all their value except as wallpaper. So it all depends on how things actually turn out. Right now, if Greece and Spain do not default and if North Korea thinks better of starting a war, shares are cheap. On the other hand …

Investment obliges you to take a view on how things will turn out in politics and all sorts of other things. That is one of the things that makes it so interesting. Another aspect of investment is the influence of personality. I tend to be optimistic and that is probably key to why I think that we will probably muddle along. In any case, it occurs to me that even if North Korea attacks, this will probably not stop people going to have a drink at the pubs owned by one of my companies, Enterprise Inns. Some things you can rely on.

Last week I was even sanguine enough to buy more shares in Paragon, a mortgage lender, which came out with good results and made hopeful noises about restarting active lending. The purchase turned out to be horribly timed. I bought at 151p and, after the market falls, they are licking their wounds, as I write, at 133p. On Monday, my fears about Greece increased, and I wanted to reduce my exposure to further market weakness without selling any of my favoured companies. So I tried something I have never done before. I bought a few shares in an Exchange Traded Fund (ETF) designed to go up if the stock market goes down. It has the strange name, DB X-trackers FTSE 100 Short, and I bought at 938p.

Incidentally, I was astonished to see how big this fund is. The market capitalisation is an amazing £1.4bn. I had not realised just how big the business of being bearish on shares has become. This is just one of a number of such funds. But on Tuesday, the market fell so far and so fast – with Enterprise Inns down 10pc for example – that I decided the bearish trend had gone too far. I sold my bearish ETF for a little profit at 981p.

Unfortunately this bit of good timing was with only a tiny amount of money. Overall, I have been nearly fully invested and my portfolio had taken a bit of a battering.


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Some comments:

Thank you Jo.
Padraig, I am sorry but you are wrong in so many ways. Long term 'investing' is just as risky as short term trading. It's all a 'gamble' as you put it, I prefer the term 'bet' as it is all about calculated risk. You're right in that gambling loses in the long run but proper trading is not gambling. You are also right that it is impossible to pick market movements correctly all the time. One does not need to and I am often wrong, but I manage my risk effectively and ensure I capitalise on the times when I am right so that I make money. I do this over and over and over. The stock market is not the only thing to money on and markets do not go up all the time. How can you say that the only way to make money is in a strong bull market,just sell futures!

And yes as you have all pointed out Warren Buffet is succesful, but he not the only one in the world. Please measure your success your own way. Mr Buffett is not the only succesful investor in the world. There are thousands. Mr Buffet has done extrememely well but I could not replicate his success with his style as my personality is not suited for the long term approach. In reality I will not be as rich as him because the volumes in the market will not accommodate my short term approach and that is fine by me. I make money and so do many others.

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Don't see your point, Paul. Stock or currency, bull or bear, you can make money. Day trading is fine if you're after 5% gains here and there, but most of us are here for 5 years or so, therefore long positions on shares are a much better idea.

I too am mostly all-in, James. It’s been a pretty stressful year or two, hasn't it? I've gone from 50% up to 35% down since Xmas, crazy times.

I agree entirely with you on the topic of your post, probably one of the most important lessons for any new PI for that matter.

Confident in Sarkozy talking tosh, I managed to pull out a blinding FTSE short (a proper CFD short, not an ETF) following the brief rally last week. It's shooting up today, but that was a lot of resistance on the 5k line it broke through on Tuesday, so I'm not too confident s/term - any any ideas for next week??!

http://www.telegraph.co.uk/finance/personalfinance/investing/shares-and-stock-tips/7767939/Diary-of-a-Private-Investor-how-the-pros-make-money-from-turbulence.html