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Articles By John Smith |
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A Turbulent Month On The STOCK MARKET - (May 2008) |
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Even by my investment standards, this has been an exciting month. The Yell shares I bought just four weeks ago (because they had fallen the most of all FTSE 100 companies over the past year) are up 25% and of course they were bought primarily for their yield of 11.1%. On the other hand, the Taylor Wimpey shares have fallen by a further 30% and so have proved to be more contrarian than value in terms of strategic pick. I am unconcerned about this fall since the yield to me is 9.6% (anyone buying these shares today would receive a return of 12.3%) and the fundamentals are still in place in that it is a huge construction business but suffering from the current downturn in house purchases. A situation we have had before and which will change over time. The value investor is not a short-term merchant. The demise in price of Taylor Wimpey (remember that they had fallen by 61.1% in the year up to last month) enables me to describe two practices employed by the investor in the stock market in this sort of circumstance. The first is known as “down averaging” or by some cynics as “catching a falling knife”. It is best illustrated by another real situation in my portfolio. About 18 months ago I bought a share called Sterling Energy. It was a typical momentum purchase but unfortunately my timing was abysmal in that the upward path ceased and a slide began. This slide was so sudden that I did not even have time to apply my “stop loss” (to be dealt with in a later article). In other words it was akin to the present experience with the big builders and also the banks. The “down averaging” involves buying more shares when you judge the bottom is reached. In my case this occurred when the shares reached a terrible price of 7p – down from the price I paid of 32p – and I jumped back in to achieve a weighted average purchase price of 14p. Over the past four weeks Sterling Energy has been in big demand and yesterday hit the magical price of 14p. It follows that my original loss is now wiped out. I could now do a similar thing with Taylor Wimpey. The second practice, that I consciously do not employ, is known as “selling short”. It is a complicated subject to describe but does explain how organisations called hedge funds aim to make money in falling markets. Basically, shares are sold that are not actually owned and then bought at a future and lower price, so making a profit. In sufficient volume, the practice itself can cause a share to fall in price and there is no doubt that banks have been hit in this way over the past few months. |
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