Trading as a Business
09/21/2005
I was an auctioneer for a charity fund-raiser this past week in a room full of businessmen. And it got me thinking about trading - as everything always does!
Only by treating their online trading like a business will Europe's 3.5m net traders discover whether they should hang up their mouses. The harsh reality for many is they should.
The reason is many simply don't trade with enough capital. Start-up costs are the first to consider, including computer costs. Let's assume you spent £1200 on hardware and assume that it's lifetime is 3 years, the cost attributable for this year is £400.
Running costs need accounting too. Researching stock picks even on excellent free sites such as advfn.com.com requires internet access: typically cost £150 annually.
Software and realtime datafeeds are another running cost - add around another £1000 to your annual running cost.
You will also want some trading books (at discounts through www.easyvalue.com or www.global-investor.co.uk) and probably take a couple of courses. So add another £1000 annually.
Commissions are a major running cost of trading of course - even with discount online brokers. Assume a typical £15 per trade. If you place 3 trades each week add another £2340.
So before stamp duty and spreads (the difference between the bid and ask price representing the amount you would lose if you sold the stock an instant after buying), your total fixed costs (those that don't increase with the trade size) amount to £5000 annually.
Now, on a £20,000 portfolio that means you require an astounding 25% return annually just to beat those costs. And that's before capital gains tax too.
Worse still, of all the expenses listed above, only commissions are deductible from your capital gains tax bill, because only commissions are directly related to the cost of buying and selling the shares.
Remember, Warren Buffett only achieves 24% annually on average - and that made him one of the world's richest men.
If you're not Warren Buffett and expect a more typical 15% average annual return, then you would still need a £33,000 portfolio to beat these fixed costs.
But with a £100,000 portfolio you need a more reasonable 5% increase to take care of the above fixed costs. How many online traders have such a large portfolio?
Clearly, too few online traders have the trading capital to overcome costs and consequently need improbable returns to make any profit.
Even if you could average a Buffet-like 24% annual return on your £20,000 portfolio, you're still not being well compensated. Imagine that you want to spend 6 hours a week researching and monitoring your positions. If you then eke an astounding £2000 profit after all costs, you are 'being paid' £6 per hour for your time.
If you want to be self-directed, the catch-22 is that with a large portfolio you could end up losing a lot more in absolute terms and if you are a novice are more likely to lose.
The solution? Paper-trade and develop your skills first or trade with a small portfolio, but expect treat it as a training activity not a profitable one initially.
Also, like all good business people, remember cutting costs can be a false economy; throwing away those subscriptions and data sites will certainly hit your ability to make returns. Of course, you could always sell your PC to raise online trading capital!
Value-Growth
On my value growth criteria which are based on stocks meeting revenue and profit growth and good value based on criteria such as price earnings growth, the following names come up. Remember they are for a 6 month outlook: Severn Trent, Fisher, Vp, British Polythene, Peel Hotels.
Remember I am targeting about 20-20% with the value growth criteria. Last year it produced 33% return. On my momentum value indicator I have Just Car, Amco, International Power, Charter.
Crazy Small Stocks
These are high risk volatile stocks which could move sharply higher or move sharply lower in my view, but will almost certainly not stand still. Names on the radar include: Life Offices Opportunities Trust, Ross, Highway Capital, Aston Villa, Emerald Energy.
Also, if you would like a free multi-media CDROM on 'Investing Better', which covers spreadbetting, CFD trading and momentum indicators like the MACD, posted to you then drop me an email with your postal address to alpesh@tradermind.com.
Spreadbetters
Spreadbetters and futures traders often look at hard and soft commodities. Here's my quick take on the action for the week ahead:
- Oil: Sideways
- Copper: Higher
- Gold: Sideways to lower
- £/$: Sideways to down
- Dow: Down
- FTSE 100: Up
- Soyabean Oil: Sideways
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