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ORIGINALLY WRITTEN May 2001
At school I received very little education about personal finance. A few maths lessons covered the calculation of simple and compound interest from the principal or lump sum and APR etc. This really did not stand me in good stead to cope with finances in adult life.
During the mid 1980s I mainly put money in safe building society deposit accounts. A few family friends dealt in shares. But I could not get my head around the volatility of shares.
In 1996 a library book entitled 'The Which Guide to Investing' really enthralled me. I learned about the mechanics of stocks and shares.
I then decided to dabble in shares. The only stockbroker accessible to amateur investors in those days was Barclays Stockbrokers.
The registration process was quite simple. The application form required basic details such as name, address, bank account details, password etc. The form is returned and a credit check is made on you. If all is well you are given a credit dealing limit, share deal account number and an introduction pack. A direct debit is also set up between your bank and Barclays Stockbrokers.
For 3 years I had a telephone dealing account with Barclays Stockbrokers. You simply call the dealers, give them your share deal account number and password, tell them whether you want to buy or sell and tell them the stock you wish to deal in.
In those days the settlement period was 14 days or 10 working days. This means that money is taken from your bank account 10 working days after the share transaction. The telephone dealing cost at present is £19.99 per trade. You also have to pay stamp duty on all UK stock dealing. Once the deal has been settled you are given a share certificate.
A bimonthly newsletter is sent to Barclays Stockbrokers customers. It usually says that the average deal is about £2500. My average deal costs about £120 including commission. I prefer to buy several shares in small amounts rather than gamble a big lump sum on one share.
Most of the time the dealers and customer service staff are courteous and efficient. But one or two can be condescending. On one occasion I requested to buy some Bentalls shares and I could hear some laughter in the background regarding my choice of share.
Around October/November 1999 many investors plunged into technology shares. Getting on the phone to the dealer would take around 45 minutes. Obviously this situation was intolerable and luckily Barclays Stockbrokers rolled out its Internet dealing service soon afterwards.
Registration takes place at www.barclays-stockbrokers.co.uk. The registration process is quite straightforward. The major difference is that you are given a digital certificate as proof of your registration.
Internet dealing takes around the same time as telephone dealing. It does take a few minutes for the site to download its software. You have 15 seconds to decide if you want to execute the deal. There is a price improver facility to give you the best price possible.
A contract note is sent after a couple of days. Once the deal has gone through you then receive the share certificate. The commission for Internet dealing is £15.99 per trade.
Earlier this year I joined the Portfolio Online service. This means that shares are held in a nominee account rather than in your name. The quarterly fee is £14.99 but this is waived if you deal within the quarter. Also no share certificates are issued which reduces the administration. The commission for dealing is £11.99 per trade. The settlement period is 3 working days. In the future it is envisaged that share certificates will be phased out.
Making money as a stockbroker is akin to shooting fish in a barrel. Stockbrokers make money on every single trade.
Over the past couple of years a number of Internet stockbrokers have started business eg DLJ Direct, Charles Schwab etc. Certainly DLJ Direct offers market reports and analyst comments on most of the stocks in the FTSE index. Barclays Stockbrokers has yet to introduce this service.
Many analysts from Barclays Stockbrokers offer their opinions on the stock market in business programmes such as Working Lunch. The most high profile analyst is Justin Urquhart-Stewart who is a director of Barclays Stockbrokers.
My financial philosophy is different from 99% of other investors. My policy is to research, buy, hold and forget about shares.
About 5 years ago there was a report produced by City analysts about profits made by regular dealing. It concluded that you would be no better off dealing regularly than if you simply held on to existing stocks.
Some profit can be made if you buy low and sell high but the commission, stamp duty and capital gains tax eat away into the profit.
Investment guides say that you should hold a maximum of 15 shares in your portfolio. I hold 18 shares in mine. This is because 18 shares produce 36 dividends payments per year which add up to 3 dividend payments per month.
BEATING THE MARKET
You do not have to be a City expert to beat the market.
A competition choosing shares was recently held between a 4-year-old toddler, a financial astrologer and a financial professional from the City. After one week all 3 participants had lost money. But the winner was the toddler followed by the astrologer.
Bear this in mind when you next deal in shares.
UPDATED October 2001
About a year ago Barclays Stockbrokers introduced its fund supermarket. This means that you can choose from a few thousand actively managed funds such as unit trusts or investment trusts.
I do not have the experience to judge which fund is a winner or a dog fund. Some people choose a fund depending on the fund manager. But these fund mangers move on to different companies at regular intervals.
Funds are like football teams. One year they do well and the next they perform badly. League tables of past performances are published in the Financial Times. But a good past performance does not guarantee a good future performance.
Some people like to consult an independent financial adviser. But the IFA will choose funds, which will generate the highest commission. Certain companies also pay IFAs a sweetener to recommend their funds. So much for the IFA being independent.
Charges for these actively managed funds can be very high. Some funds have an initial charge of 5% and an annual charge of 1.5%. There are also other undeclared hidden charges. These charges eat into the amount of capital invested.
Naively I put money into Invesco Perpetual's Asian Growth fund 5 years ago. My investment of £500 is now worth £325. But now I am more experienced and have since avoided actively managed funds.
Another class of fund available is a passive fund. These funds are also known as tracker funds or trackers.
Trackers try to replicate the movement of the stock market. Computers do all this. Each tracker has a tracking error variable. This determines how close the stock market is tracked.
Trackers have a lower initial charge and annual charge than active managed funds. Over the years trackers have outperformed actively managed funds.
Some companies offer trackers within an ISA. But the charges here are exorbitant.
In order to invest in a tracker you need a minimum of £500. You then have to drip-feed £30 upwards per month to make full use of the peaks and troughs of the market.
But there are several indices which can be tracked eg FTSE 100, EURO 100, banking shares, pharmaceutical shares, TMT (technology, media and telecoms) shares etc.
Buying a tracker fund for each of these indices can prove expensive.
The latest fad from USA and Canada are ishares. These are shares, which act like trackers. There is no limit to the number of ishares purchased. Ishares can be bought and sold like ordinary shares.
If you wish to invest in a number of tracker funds I would recommend ishares.
Barclays Stockbrokers offers a service where you can deal in ishares.
But ishares can only be held in a nominee account. There are no ishare certificates. With Barclays Stockbrokers the quarterly fee for a nominee account is £14.99 if you do not deal within that quarter. But this charge is waived if you deal within that quarter.
At present you cannot buy ishares from the Internet facility of Barclays Stockbrokers. You have to deal via phone.
The company, which manages the ishares, is based in Ireland. This means that you do not have to pay stamp duty on any purchases. But if the company goes bust you will get little compensation.
So far I have purchased iFTSE, iEURO and iTMT ishares. This adds diversity to my portfolio.
Over the past few months my portfolio has decreased in size in line with the majority of investors.
I got my fingers burnt with British Airways shares. A couple of years ago I purchased some BA shares at 445p. A couple of months ago I bought some more at 308p.
But after the recent terrorist atrocities in New York the price of BA shares has plummeted to 167p.
Passenger numbers to the USA have been reduced. Insurance has increased 10-fold. Fuel prices may also increase. So things are not looking bright for British Airways.
But Swissair and the Belgian airline Sabena have filed for bankruptcy protection. Dutch airline KLM has slashed the number of its staff.
I think that several mergers between European airlines will take place in the future.
In a bear (i.e. falling) market several investors have made money by selling short. This means that they sell shares, which they do not own in the hope that the price falls. Later on the investors buy the shares at a lower price than the selling price thus making a quick profit.
Selling short means that the investor is in effect gambling on the stock market falling. This is risky and I would not recommend this policy.
Justin Urquhart-Stewart was the director of Barclays Stockbrokers for a number of years. His constant media appearances enhanced the profile of Barclays Stockbrokers.
I liked his advice on TV programmes such as 'Working Lunch'.
But Justin is no longer a director of Barclays Stockbrokers. He is now part of Seven Investment Management which is owned by Killik & Co. Paul Killik is the share tipster for the Sunday Times newspaper.
UPDATED September 2003
DIGITAL ID INSTALLATION HELL
Around September 2002 my PC started playing up. I phoned the PC World helpline and their engineers made3 visits. The problem was that the hard drive had packed up and was replaced. Unfortunately I could not get backups of my files. Once the hard drive had been replaced, I needed to restore the Barclays Stockbrokers digital ids, which were simply files, which identify you. I had backed up a couple of digital ids on a floppy disk but these had expired.
I spent at least 2 weeks on the Barclays Stockbrokers site trying to get a new digital id for my Sharedeal account. I kept getting the softbounce error 80090016 occurred in generating a certificate request. In a frustrated state by accident I pressed the wrong option in the menu and got taken to a security certificate screen. The security certificate was quickly downloaded. But I got the same softbounce error as before. I had tried every single permutation without any success.
I turned on the PC half-asleep one morning and right-clicked the security certificate by mistake. A menu appeared and one option was to install the certificate. Apparently I had downloaded the correct software but had not installed it. A message telling us to install the software would have made life much easier for everyone.
A digital id was successfully generated the next time I went to the Barclays Stockbrokers site.
MORE DIGITAL ID PROBLEMS
After my earlier troubles, I thought that generating a digital id for my Sharedeal Plus account would be a cinch.
This time I got a 1B6 software error. I again tried every permutation to solve the problem but could not succeed. As a last resort I e-mailed Barclays Stockbrokers and got a prompt reply. They replied that Microsoft had created a patch, which had to be installed before being able to download a digital id. I downloaded this patch (a Microsoft bulletin) MS02-048.asp from the Microsoft website. Fortunately a digital id was successfully generated. But this patch will not work for PCs with Windows 95.
This episode proved that you need a lot of patience to become a successful computer programmer. I certainly did not have the required patience when I worked in the IT industry.
Over the past few months Barclays Stockbrokers completed a merger with the American stockbroking firm Charles Schwab. This meant that the site at www.barclays-stockbrokers.co.uk was revamped to include aspects of the Charles Schwab data.
The main change was a section where you could research a stock. This site also downloaded much quicker than before. You can sign up for e-mail updates for brokers tips on companies. In most cases I tend to ignore stock tips touted by the media. I really need to experience a company first-hand before buying the stock. But the Barclays Stockbrokers site is much improved than before.
PREDICTING SHARE PRICES
It would make life easier and more profitable if we could predict share prices. The best bet is probably consulting a financial astrologer or simply sticking a pin into a list of shares.
Just over a year ago I read an amazing article on the net from an American finance professional. One morning an office colleague gave him a graph of the population of 48-year-olds against time. Coincidentally he also had on his desk a graph of share prices against time. He noticed that both graphs were similar. He concluded that shares prices would follow the same pattern as the population of 48-year-olds. The demographic reason was that 48-year-olds contributed more to economic growth than any other age group.
I have always been intrigued by the work of stock market historian David Schwartz. He claimed that share prices moved cyclically. He could predict trends in various sectors by extrapolating back. One example is that the UK stock market usually rises in the year before a US Presidential election. This was because Presidents were reluctant to make major economic decisions, which could undermine their chances of re-election. I have followed his hunches over the past few years and he is more often right than wrong. I think that his website is www.schwartztrends.com.
A few years ago I read that an article that the financial risks taken by people were dependent on their personality. Ultra-cautious people only invested in sound financial products like cash. People who threw caution to the wind tended to invest in very risky products such as derivatives. Another interesting fact was that people who worked in derivatives tended to invest in safer products such as bonds.
My advice would be to invest in those financial products most akin to your personality.
UPDATED December 2005
The sharedealing service has been enhanced over the past couple of years. The main accounts are Marketmaster and Frequent Traders Club. Marketmaster has replaced Sharedeal Plus as the main execution-only sharedealing account for occasional traders. Conversely Frequent Traders is for regular traders and for deals over GBP 2K.
With Marketmaster there is an administrative charge of GBP 9 if no deals have been placed in that quarter. I think that the charge is a subtle way of making money. When I decide to purchase shares it always gnaws at the back of my mind if I am within the current quarter. Thankfully no more digital ids are needed on the PC. These digital ids have caused me a lot of heartache in the past.
A new website has been set up. Its url is www.stockbrokers.barclays.co.uk.
The new site downloads faster and has more detail than before. I think that Barclays Stockbrokers bought Charles Schwab and it is now possible to reseach stocks. Most of the improved functionality goes over my head. But the facilities would impress frequent traders.
On-line dealing is cheaper than telephone dealing. I prefer telephone dealing as I find the Scottish accent quite sexy.
After placing a recent deal I made small talk about the weather. It was sunny in London whilst cloudy in Glasgow. The erudite female dealer told me that the sun only shines on the righteous and said that I was righteous.
I must confess that when I was younger I had a crush on the singer Moira Anderson. Nowadays I am more likely to listen to the dulcet tones of Ann Williamson.
MY DEALING PHILOSOPHY
A few years back I was reading a Motley Fool paperback on finance. It said that there are around 7 different personalities around and these personalities directly correlate to their dealing philosophies. This can range from low risk share dealing to high risk warranty dealing. My own dealing philosophy is buy shares, hold and then forget about them. I am comfortable with this philosophy although it goes against the norm.
A few years ago there was a financial research analysis report which said that buying and holding shares was just as profitable as buying and selling them. It is possible to make money on a share by buying low and selling high. But one has to pay commission selling charges and capital gains tax on the profits. If the proceeds of the sale are ploughed into another stock, there is no guarantee of another profit.
I prefer making money via special dividend issues and mergers and acquisitions. A few years ago Boots had an extra well of money and decided to return this to shareholders via a special dividend of 44p per share. A few years ago Bentalls was taken over and shareholders were given a very good offer to agree to the takeover. A more recent example is New Look going private.
My buy and hold philosophy means that I do not have to consult the FTSE as to the best time to sell. If I buy the same stock for a second time, I always buy at a lower price than I did the first time around. This means that I do not succumb to greed and also obtain more shares than before. Even someone as clever as Sir Isaac Newton lost money on shares by being too greedy.
WHICH STOCKS TO BUY?
Some time back I read an article which said that one should never be emotional with shares. I have always broken this rule. It helps me to like the companies in which I buy shares. If one is buying shares and holding them for a long time, it is better to like them.
I always try to buy shares in companies which I have had experience of. There is nothing wrong with buying a share tipped in the media to do well. But making my own judgement about shares is more fun.
I fly BA and so own BA shares. I do my grocery shopping from Tesco and M&S and thus own their shares. Psychologically it is a nice feeling to enter a store knowing that you own an infinitessimal part of it. It is possible to make money by investing in penny shares. But I do not have enough day-to-day contact with these companies.
I am now off to find out where Carol Smillie keeps her sugar!