FREQUENTLY ASKED QUESTIONS

1. What is the point of valuing a share on fundamentals? Surely the only value of a share that matters is what people are prepared to pay for it.

The real value of a share as an investment depends on what people will pay for it some time in the future.  The spot price of a share is the outcome of a multitude of differing opinions about forecast dividends and what the share will fetch at some future date. The opinions differ, because apart from Share Pyx, there is no authentic method of valuing shares. So the market price lags behind true fair value based on fundamentals. The astute investor focuses his attention on the latter.

2. Isn't making money on the stock exchange simply a question of buying low and selling high?

'Question' is the right word. When is 'low' low? And when is 'high' high? Investors sometimes forget that for every buyer there must be a seller. To enable one investor to buy at what he thinks is a low price, there must be a seller who thinks the price may go lower. And for an investor to sell at what he thinks is a high price, there must be a buyer who thinks it will go still higher. Judgments about whether shares are cheap or expensive are hazardous without fundamental valuations as a reference point. That is the function of Share Pyx.

3. Isn't it better for the ordinary person to put money into a unit trust or something of that sort, rather than risk buying individual shares?

Financial organisations also put their funds into individual shares, but reduce the risk by spreading their investments. Even so, they are looking after big sums of money and it is difficult for them to make portfolio changes without pushing up prices.  The private investor has more flexibility. In general, the performance of unit trusts is patchy, so you run the risk of making a bad choice. You can manage your own portfolio successfully, providing you have a sound method of choosing shares and determining when to buy and sell them.

4. You record the performance of your TOP TEN portfolio.  Does that mean I have to buy ten shares?

Not at all.  You can choose to buy only one share if you wish.  But you can never be 100% certain about the future of a single share.  It is safer to buy several.  On the other hand, if you go to the other extreme and spread your money over a number of shares much greater than ten, you risk including some that are not as promising.    

5. Is it better to sit with a static portfolio or get in and out of shares quickly?

Making a quick profit is a fine thing. Ten percent profit in a week is 500% in a year if you can keep repeating it . You are very unlikely to be able to do that. Nevertheless you should make a practice of assessing alternative opportunities in terms of percentage gain in unit time, whether you are looking at a long-term hold or an in-out quickie. The SHARE PYX merit system ranks shares on that basis. Your Share Pyx portfolio is likely to be a mix of long and short-term holdings, all selected to maximise the time-based return.

6. Isn't it sensible for investors to act on the advice of experts, rather than try to manage their portfolio themselves?

There is an old saying that there are as many opinions as there are experts. So it is not wise to rely on a single source.  Nor is there good reason to suppose that the average of a number of opinions should be much safer; a maverick opinion may turn out to be the best.  By all means listen to what the experts have to say, bearing in mind that they are not infallible, then make your own decisions.

7. Should a portfolio include cash?

Yes, holding round about 10% cash is essential in any dynamic portfolio. If you don't have cash available, you can't take advantage of a good buying opportunity unless you sell one of your existing holdings. And you may not be able to find a share that you want to sell at that particular time. If you do have enough cash to make the purchase, you will need to sell something later to restore the cash position, but you will have the time to make an unhurried decision.  Also, cash is available for any unexpected domestic expenditure. 

8. Why do stockbrokers and other market commentators often recommend shares to buy but rarely suggest what or when to sell?

Professional people who give advice about shares are always apprehensive about being censured if their recommendations prove to have been misconceived. So they play safe. A stockbroker does not feel too bad if a share bought on his recommendation falls. He can always claim that the share was chosen as a long-term hold. But if he has advised a client to sell a share, and the price subsequently soars, the action is irrevocable and he has no argument with which to fend off reproaches.

9. I am surprised you do not mention Technical Analysis.  Surely that is an important factor in deciding what share to buy or sell

Technical analysts believe that they can predict the future movement of a share price by examining charts of its past behaviour.  New indicators based on mathematical manipulations of historical data are introduced from time to time.  They often look impressive by hindsight.  But there is little evidence that they reliably forecast the vagaries of future price movements.  That said, an appraisal of the position of a price today in relation to its recent performance may be useful in deciding the precise timing of a purchase or sale.  But fundamentals should decide what that share should be.  

10.  Does SHARE PYX incorporate a Stop Loss system?

The short answer is 'No'. When a share has suffered a heavy fall, it is easy to say in retrospect that the loss would have been less if a Stop Loss system had been in place. But use of the system in the hope of preventing possible future losses can result in shares in the 'oversold' category being disposed of at the precise time when they are about to recover.  There is insufficient space here to deal with all the arguments for and against the system. But our conclusion was that, on balance, there was no justification for including a conventional Stop Loss warning system in the Share Pyx system.