Wednesday 3 September 2014

Speculator or Investor? (Portfolio Buy)

If you call yourself an 'investor', this implies that you have a long-term perspective. By contrast, short-term dabbling in the stock market is usually labelled 'speculation'.

For whatever reason, the term 'speculation' usually comes with fairly negative connotations - and conjures up (at least for me) images of wide boys in suits with red braces. However, the objective is - one assumes - the same: to increase your overall net worth over time. It's just that the time-frame differs.

But, although I like to think of myself as an 'investor' - I have to face up to the fact that my investment style does incorporate an element of 'speculation': the bulk of the DIY Income Investor portfolio was bought in 2013 and 2014 - a speculator's time-frame.

In case you are new to this blog, the basic approach of the DIY Income Investor portfolio is to buy shares, bonds and other securities that provide income, using high yield as an indicator of market wariness - and hence potential value. Then sell them at a profit.

However, high yield is a double-edged sword (so to speak): it indicates primarily risk of failure (and loss of capital for investors). But in my (admittedly limited) experience 'the worst' doesn't usually seem to happen. Taking some care about selection - looking critically at the background and making your own assessment - means that high yield can often lead to an overall capital gain.

And, more often than not this gain comes fairly quickly - so does that make me a speculator?

Of course, if the magic doesn't work and the share/bond price does not immediately shoot up; well, then I sit back and wait for the dividends or coupons to roll in. Like a proper investor.

So, with both my speculator and investor hats on I've plumped for Berkeley Group (LSE:BKG). The FTSE 250  Berkeley Group (made up of four autonomous companies: St George, St James, Berkeley and St Edward) build homes in London and the South East - where there is a shortage of good quality homes. One interesting statistic: over recent years they have built 10% of new houses in London.

Here's how they sell themselves to investors:

"Berkeley's strategy has been developed for a cyclical market.  Residential development is not about individual reporting periods.  It is about creating value over the long-term and this requires financial discipline and balance sheet strength.  Berkeley acquires land differently to others.  The primary focus is on adding value through its development expertise, for which we have an excellent record.

Above all else, enhancing property value is about having time.  This is afforded to Berkeley by its strategy of taking low financial risk through a combination of matching production to demand, selling forward and only gearing when there is sufficient visibility of future cash flow."

(So it looks like they are 'investors' rather than 'speculators'.)

The basic numbers are a bit mixed: a fat yield (7.5%) and a low p/e (10.3) but a risky low dividend cover (1.2) - this low level of cover would put me off most potential targets. Reassuringly, the 2014 results are good and point to a sustained growth in activity - and a sustained dividend. Net cash has shot up and net asset value has grown, although the number of plots in the land bank has fallen slightly. There is also a welcome focus on paying good dividends.

Speculate to accumulate; invest to consolidate.

[Purchase price: £24.34]

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. I also picked up Berkeley for my income portfolio earlier this year and was reassured by the positive full yr results. The shares went xd for 90p on 20th Aug. Hope you are prepared for the volatile share price movement - seems very sensitive to economic news - especially the prospect of interest rate rises! Good luck with your investment/speculative acquisition.

  2. I wish you well with Berkeley. Amazing Dividend for a company doing well

    I have nibbled at Morrisons. I expect dividend to be shaved, not hammered as with Tesco. Results on the 11th of this month. Of course there might be good news. As with all hi income shares, need to have a glass half full approach.

    Good to see Huntsworth going so well. I think they are a little overvalued but long that may last. Thank you for pointing them out.

    You have done well with Balfour Beattie. It looked too risky in the long term for me but once again it only needed to have a glass half full approach.

    Thank you for the site. Very interesting – including on how to buy from supermarkets!