3 Ludicrously Simple Steps That Could Enhance Your Returns

This week, I missed out on a 23% gain in just a day. Annoyingly, a day later, the same thing happened, but on a smaller scale — just 6%.
And in each case, neither of the companies were obscure AIM-listed minnows. We’re talking about a £1.3 billion engineering company and a £1.2 billion specialist insurer.
It’s irritating, to be sure. But I’m not too concerned.
Because I reckon I’ve already locked-in decent gains — not to mention a good income stream — elsewhere, with every prospect of doing the same again.
How? Read on…

Too little time, so many shares

When it comes to shares, we all love a bargain. But how best to spot those bargains?

The FTSE All-Share index, for instance, contains more than six hundred companies, with many more being listed on London’s smaller markets, such as AIM.
All of which means it can be tricky to spot a share that seems unloved and under-valued, with its shares changing hands — perhaps only fleetingly, for a few days — at a price that screams ‘buy me’.
And it’s especially tricky when we’re all busy people, with careers and multiple demands on our attention… and just too little time to spend on nursing our investment portfolios.

My secret? A watch list

At first glance, the idea of a watch list is superficially simple.
You like the look of a share, but aren’t convinced that it’s a big enough bargain? Stick it on a watch list, and — er, — watch it.
Put like that, the notion seems ludicrously simple. Too simple, perhaps. But no. Because there’s more to watch lists than meets the eye.
Take advantage of their full power, and enhanced returns can follow.
For proof, look no further than Forbes columnist and super-investor David Dreman, author of Contrarian Investment Strategies, and founder of the Dreman Value Management investment house.

Buy low, sell high

Now, when it comes to investment books, I freely admit to being a bit of a tightwad. Rather than buying new, I’d sooner purchase second-hand on Amazon Marketplace.
So I make no apology for the fact that my own copy of Dreman’s Contrarian Investment Strategies is the 1998 edition. It really makes no odds — because Dreman’s basic analysis hasn’t changed.
In short, just like investors such as Warren Buffett and Benjamin Graham, he’s a fan of value shares, where value is characterised by attractive dividend yields, low price-to-book ratios, and — especially — low P/E ratios.
Because, over the several decades that Dreman’s various statistical studies have covered, it is value shares that have generated the greatest long-term out-performance. And which, for income investors, have highlighted the best entry-points for buying attractive income streams.


So let’s put a watch list to work.
A simple one would be just a dummy portfolio created in Google Finance — that’s the approach I use. But most data services have their own variation on the theme, however, and the precise choice doesn’t really matter.
Let’s say our research has thrown up five shares that we like the look of, and on which we’ve done some investigation.
One you first read about on Another came from a Sunday newspaper. Yet another came from reading an internet discussion board. A fourth came as a tip from a friend. And the fifth is a company that was recently in the news, following a setback.
All pass muster, except for one thing: they’re too expensive. The P/Es are too high, and the yields are too low.
In the normal course of events, those first five are soon forgotten. Other shares then capture your interest, or you simply forget them, or — most likely — you remember their names, but forget the price point at which you thought they were too expensive.
Which is where the handy watch list comes in — with a twist.

Step one, step two, step three

Step one is simple: add the shares to the watch list. Quantity: one share. Price: the price at which you first ran the rule over them, before concluding that they were too expensive.
Step two: watch and wait. I’m currently watching 32 shares. One is up 284% (Crawshaw Group as you’re asking.)  Another is up 35%. (And, as you’re interested, it’s Inditherm.)
But they’re the ones that got away. Opportunities lost. Because what I’m really interested in are opportunities to grab shares that have sunk — of which I’ve no fewer than three flirting with 20% declines. Make that four, prior to that share that shot up 23% in a day, having first dipped to a price that had my finger poised over the ‘buy’ button. (Its name? Renishaw.)      
Because here comes step three: as all these shares were too expensive at the point of first being added to the watch list, decide in advance at what price they wouldn’t be too expensive.
How? I like to express a target entry point in terms of a particular P/E or yield, but there’s nothing to stop you saying something as crude as “if it drops to £6, I’ll buy.”

Watch and wait

At which point, you pounce. Before — as I found out this week — the share climbs back up again.
Of course, the share in question may never reach your target entry point: you can’t force a share to become cheap enough to buy.
And, indeed, having fallen, it may then sink to your target entry point and prompt you to buy…

…only then to sink further.
But that’s investing for you.

So there we have it: three wealth-building tips suitable for anyone, and requiring only patience.

And what’s not to like about that?

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Malcolm sadly does not own shares in any company mentioned. The Motley Fool has recommended shares in Renishaw.