ARTICLES

Portfolio Structure

Private investors often accumulate a portfolio over a number of years, as and when they have surplus capital available. Typically, they do not give much thought about how that portfolio should be structured to maximize return and minimize risk.

To begin it is important to think about how many shares you want to have in your portfolio. If you are a complete beginner, it is usually best to begin a with small quantity of a single share. This is because, when you begin, you have no experience and your knowledge is entirely theoretical. The mistakes that you make with an investment of R10 000 are exactly the same as the mistakes you can make with R100 000 or even with R1m – they are just less painful.

We advise beginners to save up until you have at least R10 000 before carefully selecting a single share. The dealing costs in an investment of less than R10 000 will be a relatively high percentage of the value of the transaction – which means that the investment will have to grow significantly before it is “in-the-money”. Then, once you have saved up another R10 000 buy a second share – and so on.

The next question to ask is, “How many shares should you have in your portfolio?”

The objective of having a diversified portfolio is to reduce unsystematic risk. If you have only one share then you are totally exposed to what happens to that particular company. When you have two shares the risk is reduced by 50% assuming that you have the same amount of money in each. If you add a third share you reduce your risk further (by 33%), the fourth share reduces risk by a further 25%. Studies in the United States have shown that by the time you reach 15 shares, adding a 16^th share has an almost negligible impact on your risk.

But of course, each share that you add to your portfolio will spread your available time more thinly. And in the share market, time is your most important resource, not money – because how you spend your time will determine how you spend your money.

So, we advise private investors to aim for a portfolio of between 5 and 8 shares. If you are working in an investment club, you could perhaps increase this by getting individual members of the club to focus on specific shares and report back to the group. Individual private investors typically have to go to work during the day and so have a limited amount of time to focus on their investments. They must use that time wisely.

Take the time to watch the following video: Portfolio Structure attached to our lecture Module 6, “Choosing Winners”.

The video lays out the mechanism that we suggest you use when structuring your portfolio. Obviously, your watchlist must only include those shares which you consider to offer the best opportunities in the market at the moment. You do not want to waste your precious time on shares which are going nowhere. If you intend to have 30 shares in your watchlist, then it follows that you are looking for the top 1% of opportunities in the market. If the share that you are looking is not, in your opinion, in the top 1% of opportunities then you should discard it.

In your search for good investment opportunities, look for those companies that have survived the COVID-19 pandemic and are poised for growth as the economy recovers.

A good example of this might be Lewis – which we recommended to you on 2^nd September 2020 in our Confidential Report, when it was trading for 1668c. We drew your attention to the fact that it was then trading on a P:E of 6.41 and a dividend yield of 8,87%. It also had the salutary advantage of being completely debt-free – which enabled it to get through the pandemic and even grow. Today that share is trading for 4900c – a gain of 193,8% in 16 months. Consider the chart:

We still see Lewis as a good buy today on a P:E of 6,9 and a dividend yield of 6,37%.

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PDSNET ARTICLES - JANUARY 2022

Market Correction

On Friday, the S&P500 index fell about 1,9% - and that was the fourth consecutive day’s fall – which took this correction to 8,3% from the record high of 4796,56 made on 3^rd January 2022. That makes it is by far the largest correction in the 20 months since the COVID-19 V-Bottom in March 2020. Consider the chart:

The Rand 2022

It is that time of year when various experts feel it incumbent on themselves to make predictions – especially for the progress of the rand during 2022. Of course, the strength of the rand is a vital component of any private investor’s analysis because so many of our shares have significant interests overseas or are engaged in exporting.

Aveng Opportunity

Over the past few years, we have consistently recommended Aveng (AEG) as an opportunity. Those who have followed our advice have more than doubled their money.

By the start of 2022, the company had substantially reduced its debt and completed a 500-for-1 consolidation. These two events have returned the share from being a marginal penny

Portfolio Structure

Private investors often accumulate a portfolio over a number of years, as and when they have surplus capital available. Typically, they do not give much thought about how that portfolio should be structured to maximize return and minimize risk.

To begin it is important to think about how many shares you want to have in your

Clicks

In our company investment club (which we introduced you to in our article on 14th December 2020) we showed that we had 46 Clicks (CLS) shares for which we had paid an average of R228.17. Subsequently we bought a further 41 Clicks shares on 3 of May 2021, at a cost of 245.61. This transaction brought our average cost up