Emperor Asset Management CIO Tom de Lange has made it easier than ever to understand how to be a profitable investor. Take a look at his latest article, 5 Easy Investment Rules to Beat the Market, to truly understand the secrets of success. Investment for Dummies at its finest.
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Rule no 1: define your investment universe, the more novice you are the narrower your stock universe should be towards more liquid, larger stocks e.g.:
Rule no 2: Min 10 stocks max 30 (if you think the market is in a strong bull phase then you should tend to holding less stocks than when you are uncertain about markets and concerned about a possible crash or bear market)
Rule no 3: no more than 1/3 of your portfolio must be in stocks from the same sector e.g. resources, financials etc.
Rule no 4: Start with equal weights e.g. if you choose 20 stocks the divide you capital by the no of stocks you want to own and by the value of each. E.g. you have 10 000 to invest and want to own 20 stocks, 10000/20 = R500 value per stock or in other words a 5% weight per stock (hence the name equal weights)
Rule No 5: agree periodic portfolio reviews upfront and stick to them choose either quarterly, biannually (recommended) or annually.
At these review periods you need to reduce holdings to losing stocks as well as stocks that have appreciated (gone up) more than 50% from their starting weight (5% from example above)
Firstly calculate your portfolio value at review, let’s say it’s now worth R12000 (up from R10000)
Secondly calculate the weight of each stock in your portfolio e.g. stock value/portfolio value = weight
Thirdly let’s start with the winners (highest weights) – if their current weight (CW) at review now exceeds 150% of their starting weight (SW) (SW 5% * 150% = 7.5%) then it’s time to take some profit and reduce the weight back to the starting portfolio weight (5%) To do this work out what 5% of your current portfolio weight is (12000 x 5%= R600) and sell the value of stock to reduce the weight value back to R600. Do this for every stock with a weight above 7.5%. This process will free up some cash which once we are done with the losers we will be investing.
Fourthly let’s deal with the losers or underperformers which are holding your portfolio back. Remembering your SW was 5% so any stock with a CW of less than 5% has underperformed your portfolio returns rankthese from lowest weight to highest weight. The smallest weights making up less than or equal to 15% of your portfolio should all be sold. See example table attached
All cash realised through selling must then be utilised to buy new stock (not ones you already have or have recently sold). If you want to maintain your number of stocks held prior to review then quite simply divide the cash available by the number of stocks you need to buy to match the no of portfolio stocks and buy them in equal quantities. This is nice and easy.
However if you want to buy new stocks at your original equal weights, like done below multiply the current portfolio value x your starting weight = new purchase value. Then prioritise your stock purchases and buy them in these weights until you cannot afford a full weight and that last stock will be purchased at a lower weight. See below Finally record your new weights for your next review as these become your new starting weights.