How to Choose Stockmarket Winners: A Minimum Risk System for the Private Investor

177 Pages·1993·4.385 MB·English

by  CALEY, Raymond

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238
HOW TO CHOOSE
STOCKMARKET
WINNERS
RAYMOND CALEY
Qt)
CID
PlATKUS
For Lynne
DISCLAIMER
Share prices and dividend income can go down as well as up. The
sharesinthe companieswhichare discussed inthis book have been
selected for illustrative purposes only. Their inclusion does not
amountto arecommendationor otherwiseofthe sharesconcerned.
Inaddition,thisbooksetsoutaminimum-risksystemforinvestingin
shares. However, the decision to investisfor the readeralone who,
havingappliedthesystem inthe makingofthatdecision, willhaveto
determinefor himselfwhichriskcategoryaparticularshare belongs
to. Accordingly,neitherthe authornorthepublisheraccepts respon
sibilityforanyinvestmentdecisioninrelationtoashare madebythe
readerinrelianceonthe system describedinthisbook. Ifthe reader
isinanydoubtastothe courseofaction totake inrelationtoashare
orastothetaximplicationsforthereaderinrelationtothatcourseof
action he should take advice from his stockbroker, bank manager,
solicitor, accountant or other professional adviser authorised in
accordance with the Financial Services Act 1986.
©1993Ray Caley
First publishedinGreatBritainin 1993by
JudyPiatkus(Publishers)Ltdor
5WindmillStreet,London WIP IHF
The moral rightoftheauthor
hasbeenasserted
A cataloguerecordfor thisbookis
availablefrom theBritishLibrary
ISBN 07499 12456(hbk)
o
7499 12502(pbk)
DesignedbyPaul Saunders
GraphsbyDick Vine
TypesetbyPboenixPhotosetting,Chatham, Kent
Printedand boundinGreatBritainby
Mackays orChatham PLC,Chatharn, Kent
Contents
Acknowledgements vi
Introduction vii
PART ONE
1 Stockmarket Winners 3
2 Preparation 13
3 When tobuy- and sell 47
4 Company Value Based on Earnings 67
5 AFramework For Valuing Shares 79
6 Examples Using The Framework Equations 91
7 Choosing Your Winners 98
8 Stockmarket Home Truths 116
PART TWO
Stockmarket Winners - Case Histories 121
A. Airtours 124
B. Crown Eyeglass 134
C. Domino Printing Sciences 140
D. Hampden Homecare 147
E. Park Foods 152
Glossary 161
BibliographyandInformation Sources 163
Index 165-166
Acknowledgements
Iwould like to thanktwostockbrokerswho have providedunfail
ingsupport since my departure from the City in 1988.Theirflow
of ideas has kept me up-to-date. In any profession, including
stockbroking, there are those who function at work because it
happens to be a job. Fortunately there are others, like Dennis
Keatesand SimonTalboys,whoofferavocationalcommitmentto
their post. Their enthusiasm for talking objectively about com
panieshas neverwaneddespitelong periodsofmarketinactivity.
Most stockbrokersput inextremelylong hours,oftenwithvery
little reward to show for it. Remember that when your broker
deals for you at eight o'clock on a January morning, in order to
serve you he or she has had to vacate a warm and comfy bed well
before dawn. Therefore, please be understanding.
Ithas been adelightworkingwith PiatkusBooks. Iamluckyto
have participated with an enlightened organisation composed of
friendly people who understand theirauthors. Iespecially would
like to thank Gill Cormode for subtly helping me to refocus the
original manuscript. Carol Franklin's advice on this matter, and
her editing, is also appreciated. Nina Webley ensured that
communicationsbetweenPiatkusand myselftookplace withouta
hitch. Thank you Nina.
Introduction
This book is aimed at the experienced private investor keen to
make hisor her own share selections using a systematic method
that minimisesrisk. Mycredentialsare that Ihave been an active
investor for twenty-fiveyears, working for ten years as a stock
broker in the City, but in recent years operating from a home
base.Beforehandmycareerwasinscience.Thisunique combina
tion has enabled me to tailor the book's contents into a form
which takes account of the difficulties facing private investors
without any Cityexperience.
Relyingonflimsy share recommendationsinthe financialpress
is a lazy and dangerous approach to investment. In their time
shares in Maxwell Communications, Polly Peck, Parkfield and
Clarke Foods were alltoutedin the press asbeing 'the best thing
sincesliced bread'. History shows that sliced bread has actually
hadtheslightedgeoverthese investments! More tothe point,any
advantages gained from acting on the more successfulpress tips
are outweighed bythe disadvantagesof the dreadful ones.
Theonlywayto achievecontinuousinvestmentsuccessisto be
very selective. In brief, the method I advocate is to choose a
handful of shares and then to optimise times for buying and
selling.Chapter 1condenses examples ofallshares pickedoutby
my method since the time the UK first joined the ERM and
interest rates began to fall. After studying this book, and given
favourable stockmarket conditions, there is every reason for
you, too, soon to feel confident of securing investment gains
comparable to many described in the examples.
Theinvestmentcrunchispickingthe rightshares. Itmaybethat
viii HOWTOCHOOSESTOCKMARKETWINNERS
in a raging bull market, when nearly all share prices seem to be
risingstrongly, random pin selections could be just asfinancially
rewarding as shares chosen by careful research. However, an
absenceoftechniqueusuallyleadstotroubleinanyothermarkets
than bull markets.
You are unlikely to make a killingifyou invest your money in
Footsie 100companies. That isnot where the exciting growth is.
In thisbookIwillshow youhowtosiftsystematically throughthe
thousandsofquotedsharesonthe Londonmarketandtoarriveat
ashortlistofmedium-sizedcompaniesthatare poisedtorise. You
willbe lookingfor companieswith acapitalisation of around £30
million. Iwilldemonstrate how you can choose individual shares
before their prices rise too much and before the institutions,
whose main funds consider companies of £100million and over,
move in.
Inan 'average'year theremaybeonlyahandful ofsharesworth
investing in, where prices are expected to double in a year, and
where there isjudged to be a minimum risk. More to the point,
commentators are predicting that the 1990swill be a decade of
slowgrowth for the UK economy. Returnsfrom portfolio invest
ments based on equities(shares)are anticipatedto belack-lustre,
and therefore increasing emphasis will be placed on spotting
individual shares likely to outperform the market.
You should not sit back after reading this book and expect
profits to accrue effortlessly. The advice I offer has limited value
withoutadedicatedfollow-up. Inparticular,ifashare pricekeeps
rising there isan obligation on you to establish the reason why.
I call my system the 'Forward Earnings Technique'. Daily
monitoring of share price movements is imperative. The back
bone of the technique relies on uninterrupted record-keeping.
Thesystemdependsonretrievinginformationrapidlywhenasked
to do so. Don't be tempted to let your records gounattended for
several days with the intention of catching up at a later date. It
could spoil your chances!
Youare welcome toimprovise onsomeoftheideasIsuggest,or
abridge them, but youmust bearinmind that the reward willonly
match the levelof your input.Ifyou want to keep your workload
down to aminimum and yetachieve optimumresponse fromyour
efforts, then select sectorsofthe marketwhere youexpect recov
ery to bestrongest. For instance. the firstsectorslikelyto recover
INTRODUCTION ix
from recession in an economic cycle are usually consumer-led.
Sectors to concentrate on include stores, brewers and distillers,
hotels and leisure.
If, bythe time youcome across thisbook, the recoveryisinfull
swingthen focuson the industrialsectorswhere prospectsgradu
ally respond to increasing demand from the High Street. Elec
tricals, engineering- general, metals and metal forming fall into
thiscategory.
The essential elements of a successful investment scheme are:
I. The detection of initial share price moves.
2. Buyingahead of the crowd.
3. Sellingallthe shares you hold inacompany at the right time.
For the Forward Earnings Technique to be effective you must
finalise this last step before the host of other sellers compete to
dispose oftheirholdings.
Part One describes the Forward Earnings Technique. In Part
Two Ilook indetail at several of the shares Iselected inorderto
show you how the technique works in practice.
Once you have read How to Choose Stockmarket Winners you
should be primed for action. You willbe familiar with the right
techniquestofollowand unlikelytoflagat maintainingthe neces
sary records.
The ideal disposition required by a successful investor can be
cultivated. Ihope youwillfindthe learningsessionabsorbingand
follow it with a practical and profitable experience on the
stockmarket. Once you are on top of the subject you willfind it
both stimulating and fun. I hope that this book willpave the way
for you to enjoy many years ofsuccessful investment.

PART ONE