One of the great things about being new to investing is that we can focus our cash in our best ideas. We have to, because with many brokers charging at least £5 per trade, a round buy and sell will cost us 2% of our capital on a £500 position!
Now, 2% doesn’t seem much, but over time those fees are going to eat into our returns. Therefore – at least in my opinion – it makes sense for us to invest at least £1,000 per position.
We still can be diversified
One of the benefits of a larger portfolio is diversification. But – we can still be diversified here. With £5,000, we can have five investments that are 20% of our total portfolio each. Now, that might be a little on the gunslinger side, but as I said, the smaller portfolio forces us to buy into our best ideas.
That means it’s up to us to go and find them.
Getting an idea
Many people like to claim investing is a boring activity, and while it does require a lot of patience, it is far from boring. In fact, it’s quite exciting to find an idea and unearth a hidden gem that the market hasn’t discovered.
The larger market cap stocks are more efficient, as teams of analysts pour over every line in the financial statements, but the small-cap market is hugely under-researched. For the private investor who is willing to sit at the table and get their hands dirty – one can very definitely find gold.
Three years ago Bushveld Minerals was trading below 3p. In 2019 it hit a high of 50p. I’m not saying these stocks are easy to find, but I am saying it’s possible.
Ideas can come from anywhere. The shopping mall, the workplace… you might even notice that there is a new brand on the block that is popping up everywhere. Behind every stock is a story – go and learn it.
Developing the story
In my opinion these are the most important things to uncover:
- Cash is king – How much cash is on the balance sheet, and does the company generate cash from its operations? Stocks that don’t generate cash need to rely on cash injections further down the line; these are often at a discount to the prevailing share price.
- Management ownership – I want to see entrepreneurial management and directors having skin in the game (nil-cost options do not count!). Who do you want running your business – a motivated individual or a clock-puncher?
- Increasing revenue – It’s hard to boost profit and earnings when top-line sales growth is declining year over year. Companies can increase profit by cutting costs and slashing the workforce, but very often trimming the fat ends up cutting into bone. Be careful of stocks that are sliding in the sales department.
I’d buy stocks with all three of these qualities. The goal is to not lose money, and the best way to do this is to pick your best ideas after careful consideration.
Michael Taylor has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019