Tuesday 29 January 2013

Portfolio Sale: William Hill (LSE:WMH)

Buy and Hold. And then Sell?

Today's surge in William Hill's share price - the result of very good results over the past year - gives me the opportunity to sell a chunk of my holding at cost price. This was my largest dividend share holding but now the remaining portion is one of my smallest.

What's going on? You may well ask...

It's the yield, of course - currently down to under 3%. It was paying a lot more when I bought it back in 2008 but it has disappointed and the company committed the cardinal sin for a DIY Income Investor: cutting the dividend.

You may well call me a slave to my human behavioural biases (and I couldn't argue with you really) but here is my investment thesis, as represented by this particular share:
  • BUY - based on yield, good fundamentals and market position
  • [company runs into trouble and cuts dividend, together with a quick and large fall in share price - the classic dividend investor's 'double whammy']
  • decide that the company will probably survive and, hopefully, recover: HOLD
  • [company recovers, produces improved results - share price rises back to original purchase price]
  • decide that, although the company it likely to continue to improve, the yield is not likely to be attractive enough for the foreseeable future: SELL

So that perhaps illustrates one key behavioural bias - the unwillingness to take a 'paper loss'. I can rationalise it to myself by saying that at least I had *some* income over the years that I was waiting for the recovery.

The key objective question is whether the recovery in share price over the period compensated for the lost income in another investment. The following graph shows the problem - once confidence in the company is lost, the share price can plummet.

Chart forWilliam Hill PLC (WMH.L)

But let's undertake a quick 'thought exercise':
  • assuming the share price falls 20%, and I sell the share
  • to get back to my original price would require a subsequent increase of 25% (20/80)
  • assuming I could get an annual return of 5% (not unreasonable), it would take around 5 years to recover the capital loss (assuming no capital gain in the new security)
  • so, instead if I hold onto the fallen share and wait for a recovery, and this happens within 5 years, I would be better off 

Is this 'post hoc' rationalisation? Or might it make sense to 'Buy and Hold' even through a disappointment? Obviously, this only holds true (if it does at all) if there is a reasonable expectation of a recovery. For some shares (and I am looking at you, HOME) the future may look bleaker.

For now, I have to say this approach seems to work.

[Sale price: £3.82]

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

1 comment:

  1. I bought in 2009 at £1.70 and I'm holding. Like you, however, not so lucky with HOME, but I'm holding there too.