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How I invest: taking baby steps to achieve a 250% return
Enthusiastic investor David has lived an active life over his 75 years having worked on four different continents as far afield as Africa and Australasia, and in the process, he has accumulated six different pensions.
David told Shares that when he was younger, he didn’t appreciate the importance of pensions, partly because he was too busy working.
Today David enjoys spending most of his time researching stocks and managing his own investment pots. ‘It is my job 24/7 and I love it,’ he says.
It has been around four-and-a -half years since David took the decision to manage his own investments and he feels that the 250% return he has generated since has vindicated his decision.
He makes use of a myriad of investment resources including Shares while also attending investment club meetings.
David also attends a variety of company presentations through various organisations.
FOCUS ON TECHNOLOGY
David has a technology focus because he believes the sector has the fastest growing companies and therefore offers the best potential returns over the long run.
A strong work ethic is vital in David’s opinion to achieve investment goals. He says: ‘I think it is most important to state that to do this takes a lot of time and effort.’
He offered up an example of how hard work leads to success by referencing tennis teenage star Emma Raducanu, explaining ‘she has worked very hard to achieve her success’.
David adds: ‘I read all the RNS (regulatory news service) statements at 7am; I read lots of journals, investment reporters in the media and I watch all the company presentations I am interested in.’
David is an avid reader of investment books and says he has been influenced by Mark Slater’s The Zulu Principle, The Art of Execution by Lee Freeman Shor and The Reminiscences of a Stock Operator by Edwin Lefevre which was first published in 1923.
The last book’s main character is thought to have been based on famed trader Jesse Livermore who made and lost three fortunes.
In the US stock market panic of 1906 Livermore’s huge short positions netted him a cool $1 million in a single today, worth around $30.5 million in today’s money. Shorting involves selling shares with the intention of buying them back at a lower price and netting the difference.
David has adopted one of Livermore’s investing methods for his own use, involving what he calls ‘baby steps’. The idea is to invest slowly at first with a view to adding over time on news flow that supports his original investment.
For David a single step is worth £3,000 and the maximum number of steps he generally works with is generally is five, although he has made exceptions for investments which he considers have a lot of potential.
One example is when David recycled a profitable investment in web-based portfolio analysis and asset pricing services company Statpro into ‘system on a chip’ processor company Ethernity Networks (ENET:AIM).
That gave him a starter position of five steps which he has subsequently added to, resulting in an eight-unit position.
One of the advantages of David’s system is that mistakes are quickly weeded out and don’t hurt as much as they otherwise would because they tend to be smaller positions.
One of the traits of the technology sector according to David is that momentum can be a key driver stock returns, so he reasons that adding to already winning positions should be rewarded over time.
In a nutshell David is looking for an attractive growth narrative, a good management team and evidence that the shares have positive momentum.
David believes that his baby steps approach aligns his perceived risks with each position size and therefore allows him to ‘sleep at night, which is also important’.
One drawback is that if an investment works ‘out of the blocks’ the performance is diluted by its relatively small portfolio weight.
KEEPING CASH ON HAND
A further trait that David has adopted from reading about Livermore is his insistence on keeping a cash reserve (a lesson Livermore adopted late in his life), in David’s case around 10% of his portfolio which he described as ‘untouchable’.
One of the reasons that David is excited by Ethernity is the potential role that the company’s ‘programmable’ chips might play in the next generation or 5G phone networks.
The chips can be programmed in the field and process data in parallel as opposed to sequentially which significantly reduces latency and power usage.
David explains: ‘Ethernity’s ACE-NIC (network interface
card) is currently the only SmartNIC with a router on its FPGA, (field programmable gate array) and its technology is protected by patents.
‘It can save up to 80% cost compared to software-only solutions using CPUs. It has been optimised for telecoms over 17 years.’
David has found it a good discipline to map out his thoughts and investment decisions through an investment blog which he updates regularly.
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DISCLAIMER: Please note, we do not provide financial advice in case study articles and we are unable to comment on the suitability of the subject’s investments. Individuals who are unsure about the suitability of investments should consult a suitably qualified financial adviser. Past performance is not a guide to future performance and some investments need to be held for the long term. Tax treatment depends on your individual circumstances and rules may change. ISA and pension rules apply.