Monday, 20 May 2013

Portfolio Sale: BT Group (LSE:BT.A)

Source
‘Buy and Hold’ is a fundamental part of my DIY Income Investor approach. The problem is that ‘Buy and Hold’ is indicative of psychological biases at work. The received wisdom is to ‘hold your winners and sell your losers’ - but I’m just not built to do that. But it has to be said that ‘Buy and Hold’ can sometimes feel like ‘Buy and Watch Your Money Disappear’.

A good example of 'Buy and Hold' gone bad is my holding in BT: bought in April 2007 and sold today, six years later, for pretty much what I paid for it.

The ‘Buy’ part is all-too-easy, so I set myself some valuation hurdles: yield, dividend cover, debt levels, cash flow, market position, etc. The ‘Hold’ part is made easier by only buying high-yield securities - so if the price starts to fall, I can console myself with the thought that the income is still dripping into my brokerage account.

That’s usually OK until disaster strikes and the company cuts the dividend, usually as a result of poor performance. Then the Income Investor is hit with a ‘double whammy’: reduced capital value AND reduced (or no) income. It is then that you need to take desperate measures - either ‘abandon ship’ and sell, or consign the share to the ‘sin bin’ (sadly, it is usually not the only one in there).

That is the fatal flaw of ‘Buy and Hold’: by not reacting quickly to a problem (be it a dividend share or a fixed-income security) the problem can become worse.

In a surprising number of cases, I am happy to report that my ‘sinners’ do eventually recover, although I sometimes need to be very patient. The rational analysis is that, if you expect a recovery in the price, this may be a sensible course of action, although it clearly depends on the time it takes. The Income Investor’s money has an ‘opportunity cost’ - this is the basis for comparing yields (and risks) when making investment decisions. So - rationally speaking - if, say, the price falls by 50% and the yield falls from 6% to 3% (i.e. due to a dividend cut), it may be worth waiting for a price recovery (assuming you think this is likely), rather than selling, crystallising the loss, and reinvesting the money somewhere else. But sometimes the recovery takes longer than it should.

That is the case with my holding in BT. I bought what seems an age ago (April 2007) not-so-cleverly finding the market peak - and then watched the price fall from over £3 to under £1. (I sold some previously.) Today’s early leap in the share price (based, apparently, on giving away free sports programming!) brings me back to within touching distance of my purchase price.

Now, a coldly rational investor would say that this purchase price is just a number and that I am guilty of ‘anchoring’ - fixating on a price rather than looking at fundamentals. Well, I'm afraid that I'm guilty as charged - but that’s my ‘system’, such as it is. As I wrote previously, we all have to find an investment approach that is acceptable to our ‘monkey brain’ biases.

With a forecast yield of 3.5%, forecast dividend cover of  2.3 and a p/e of around 10-11, BT is now not that far away from DIY Income Investor territory. But I just don’t think it is a good idea to try to take on Sky Sports. And it is a past dividend-cutter.

So, thanks guys, for pushing the price back up. Why did it take you so long?

[Sale price: £3.2177; original purchase price: £3.147]


[A version of this post appeared previously on citiwire money]


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.

2 comments:

  1. Well, at least you are willing to consider selling as the idea of not selling can be quite harmful to your return. As you pointed out, it can so easily be "Buy and Watch Your Money Disappear".

    But then, it does come with a caveat that you have to be fully prepared to lose all your money. So really, it is really the matter of "Buy and be mildly amused at the unfairness of the world while watching your value vanishing." It is certainly is in my case!

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  2. Interesting, in that the subject is how we make decisions. I too suffer from quite agonising reluctance to sell. I am risk averse by nature, and this seems to equate to clutching fearfully onto an investment lest a sale crystallise a loss. I am equally poor at selling gains, though with those there is an argument to continue to hold. There is only one big dog in my holding pen these days : iShares South Africa.

    Given my cognitive weakness there is only one investing style that suits me ( buy and hold ) and only one goal - (value creation preferably through income generation) and so I avidly wait for dividends to arrive so that I can channel them towards further investments. It's an odd thing - my mate Rene is only happy with speculation : buying in order to dump as soon as a profit is locked in. Completely different outlook : couldn't bring myself to do it, and he would have trouble sitting on a static asset. We both make about the same return!

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