Investment Strategies of

London Stone Securities

INVESTMENT STRATEGIES OF LONDON STONE SECURITIES
Welcome to London Stone Securities. This report has been
created as an easy to read document for all types of investors,
from expert fund managers right to complete novices. It is
intentionally simplified so as not to over complicate the
subject matter.

More to the point, our research shows that successful

investment strategies do not need to be complex or over-
bearing. To the contrary, it has been consistently proven over
the years that the most effective strategies have tended to
be those which are relatively easy to follow and implement,
particularly during times of market uncertainty.

As you will be aware, the markets remain a largely

unpredictable arena in which to make consistent gains.
That is why at London Stone Securities we have brought
together over 100 years of trading experience to establish an
investment strategy which works equally well in all markets So if it only works for some of the time, then why does
up, down and sideways. Thankfully the techniques illustrated it continue to be so popular? Well there are two main
below do not involve reinventing the proverbial wheel but reasons. Firstly because it is cheap (there are no transaction
are an adaptation of tried and tested investment strategies costs) and secondly because it is a very easy strategy to
that have proven to be successful over the decades. implement, so easy in fact that you do not actually need to
do very much; you buy your shares, and then sit and wait!
What our research has also shown is that to ensure long term There may also be other factors to consider including capital
success, investors must be prepared to adapt to the ever- gains tax problems but even these issues can be overcome
changing dynamics of the economic, political and financial with a bit of careful and sensible management.
markets. Therefore a degree of flexibility and an open mind
to new investment and trading strategies is required in order Invariably and as a direct result of this long term approach,
to attain the greatest level of portfolio performance. investors will experience waves of success and failure
(positive returns in bull markets and negative returns in
Most importantly, it is essential to recognise that no one bear markets). Therefore, over the course of a decade what
strategy works all of the time. If it did, then somebody most investors will generally find is that returns and losses
somewhere would have already found the holy grail and will even themselves out to give only a very modest return
would be using it now to full effect. The truth is that there that in most cases usually barely beats inflation.
is no holy grail because being successful in investments is a
delicate game of probabilities, and it is how adept you are That is why we believe private investors hold only half of the
to stacking these odds in your favour that will ultimately puzzle and as an FSA regulated business committed to helping
decide how successful you are. The best traders that we individuals like you to succeed, we would like to offer you
have seen are those that can assess the current market an opportunity to view (and use if you so wish) the missing
conditions and change their game plan when required of pieces to this puzzle. Furthermore the implementation of
them to do so. some or all of the strategies demonstrated in this article can
be introduced both quickly and easily to improve the overall
History and research have also shown us that almost 90% performance and structure of your own portfolio.
of retail investors will tend to follow the same investment
strategy that they have always used in the past and in the If you wish to use the services of London Stone Securities we
majority of cases this is usually the traditional long term buy also offer a wide array of different tools, products, systems
and hold strategy. Indeed it is most probably the case that and research capabilities that you can use completely free
your own strategy is also buy and hold and you havent really of charge. We would also happily prepare your end of year
given too much thought about doing anything differently. tax returns for your accountant by producing dividend and
capital appreciation tax certificates to make life that bit
Whilst this strategy undoubtedly does work, it is also clear easier for you, although we would usually encourage clients
from years of research that it works only some of the time, (where possible) to use tax-efficient wrappers such as stock
this being in a rising market. In a volatile market or worse ISAs, SIPPs, Trusts, offshore company formations or other
still a falling market, a buy and hold strategy is the worst similar types of investment vehicles.
strategy to employ for obvious reasons.

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
Risk Warnings
All types of investments and strategies involve risk and so before implementing any changes to your portfolio please seek
independent financial advice to ensure that the strategies contained in this document are indeed suitable to your propensity
to risk and investment objectives. For example; whilst a number of different strategies and products are suggested, they
may not be suitable to you and your circumstances or they may simply not be available for your chosen investment product
at that point in time.

The content is also only accurate at the time of publication and it may be the case that the ideas and strategies of London
Stone have since changed in a response to adapt to a fundamental shift in market conditions or due to a change in either
the economic or political landscape.

Whatever the case each investor is unique and will have their own investment aspirations, attitude towards risk, preferences,
ideas and beliefs. Furthermore, they will have varying financial circumstances and their own tax position to consider. In
summary, we offer this document as a useful starting point but please seek independent advice before implementing any
strategies within it to ensure that it is suitable to you and what you are trying to achieve.

Time of Publication
The content of this document is only the view of London Stone Securities. It is therefore entirely the subjective view of our
research team and organisation and should not be regarded as anything but. There are also elements within this document
which are applicable to the stock market at the time of publication and therefore there may be elements of this document
which are subject to change.

Whist every effort has been made to ensure that the content within this document is factually correct we cannot guarantee
this. Please therefore conduct your own reading and research and always seek independent advice before proceeding with
any investment strategy of your own.

1 BEFORE YOU BEGIN INVESTING

It may seem like a bizarre statement to make, but in actual fact you are probably more successful in picking winning
investments than you think you are. Why? Because researching and analysing investment opportunities is only one half
of the equation. Admittedly its a big part but it is only one part nonetheless. The other part which is at least as important
(and some would argue even MORE important) is the EXECUTION efficiency of the investment both in terms of the buy
and the sell.

1.1 Commission
When making a purchase you will face a number of costs. The first and most obvious one is the commission that is payable
to your broker. Depending on who you use, this is probably anything from 7 - 12 for online trading although for anything
less than 10 there are sometimes certain restrictions which apply such as a minimum of transactions per month etc.
However the cost is negligible overall when executing online. For telephone based transactions rates vary from broker to
broker but usually it is about 1% on average. Clearly therefore, there is a significant difference between telephone based
and online dealing and so you should always try to use the online facility wherever possible to minimise your overheads or
use a telephone based service which is as competitive as online.

At London Stone its worth remembering that we charge only 10 for execution only transactions irrespective of whether
it is online or over the telephone.

1.2 Account Costs

The second cost which is applicable usually depends on the type of account and broker that you use. A stock ISA for
example may have an annual charge or not, depending on which brokerage firm you use. Similarly there are usually annual
charges for a SIPP which is sometimes either a fixed fee or a percentage of the value of the portfolio. In the case of hedge
funds there is usually a fee charged as a percentage of the funds under management, typically 1-2%. There may also be
other hidden charges such as account opening fees, closure fees, inactivity fees, transfer fees etc.

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
 1.3 Transfer Fees
This again is a fee that is not always apparent when you
first open an account but is often used by some brokerage
houses to create inertia for investors to switch providers.
This fee is applied to each individual holding, and will
vary between 15 to as much as 50 per line of stock
depending on your broker. What that means is that for a
portfolio of 30 companies it can cost you as much 1,500
to transfer your share holdings to another broker of your
choice. What you should be aware of is that the transfer
of cash is usually entirely free although most investors are
reluctant to sell their portfolios and go into cash.

In the case of certain broker-specific funds including some unit and investment trusts your broker may not allow you to
transfer them at all forcing you to cash them in first. Thankfully this is something that the FSA have now clamped down on
to enable investors to be able to make a free and fair choice as to which brokerage firm they wish to use.

1.4 Stamp Duty

Stamp duty is a tax which you always have to pay, right? Wrong. There are a number of non-UK domiciled companies
currently listed on the UK stock market which means that they are eligible to be exempt from stamp duty. Amongst
other companies this includes; Centamin Egypt (CEY), Xcite Energy (XEL), Heritage Oil (HOIL) and even some FTSE100
companies including Randgold Resources (RRS) and International Consolidated Airlines Group (IAG) formerly known as
British Airways.

By looking at those companies which are exempt from this tax there is a saving (albeit small) of 0.5% per purchase. However
for the more active investors amongst you this can add up to a considerable total cost saving over the course of a year. For
certain companies like Kenmare Resources (KMR) the level of stamp duty can be as much as 1% so remember to read the
small-print before you buy.

Stamp duty can also be avoided altogether by using alternative investment vehicles such as Contracts For Difference
(CFDs).

1.5 Capital Gains Tax

Another tax which investors always expect to pay is CGT but once again there are legitimate ways and means around this
also. In addition to the obvious tax shelters of stock ISAs and SIPPs, there are a number of alternative investment vehicles
to traditional share buying such as spread-betting where CGT does not apply.

1.6 CFDs and Spread-betting

CFDs and spread-betting are investment vehicles which are often given a wide berth by investors due to the perceived
increase in their levels of risk. However the truth of the matter is that the risk comes only from the LEVERAGE (or GEARING).
Therefore CFDs and spread-betting can be as low or as high risk as you wish them to be. Generally speaking when taking
advice from brokers an element of gearing is normally suggested or encouraged because brokerage firms receive commission
on the inflated figure (therefore its in the interest of the broker to leverage up your portfolio); remember however that
you dont have to and in fact at London Stone Securities, we actively discourage you to because of the heightened risks
involved.

If you choose to use no leverage at all then CFDs are no riskier than normal equities. In fact because they have less costs
attached (no stamp duty and less commission than equity trading), they could in fact be described as lower risk.

A particularly clever analogy that one of our clients once used to describe CFDs went as follows: A CFD is like a Ferrari;
depending on who is driving it can either be fast and dangerous or powerful but safe. Or to put it another way, its not the
car but the person sat behind the wheel that dictates what it does.

That said its important to understand the most appropriate times for using CFDs. For long term investors CFDs are not
usually a good idea as they attract daily financing (interest) charges.

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
In addition, the full dividend is not receivable so its never a good idea to hold a CFD position on a stock which is about to go
ex-dividend. As a result, CFDs are particularly useful and best suited for shorter term horizon trades. Another solution entirely
for CFDs is not to speculate but instead to use it as a hedging tool to preserve the exposure of an existing portfolio. In fact the
whole concept of derivatives (first introduced in the late 1800s by wheat farmers) was to reduce risk and not to increase it.

Whatever the case, at London Stone Securities, we prefer to give investors a real choice so that they fully understand the
product. Dont be put off by either your past experiences or what you have heard from others; make an informed choice
on the facts only. As part of a managed portfolio CFDs, spread-betting and even options can be used to reduce the costs of
investment and provide an insurance policy (hedging) against a significant market drop.

1.7 Spread
This is and has been an issue since the beginning of time with share dealing. The spread refers to the difference between
the buying and selling price of any share. Therefore if company ABC is trading at 200-202 this refers to the stock having a
2p spread. Put it another way, you could purchase shares at 202p if you wanted to buy, but if you wanted to sell you would
receive only 200p. The spread therefore is 202-200/200 = 1%.

That means that the moment that you have made the purchase you have theoretically lost 1% of your investment i.e. your
shares must go up by at least 2p before you are back to break-even.

For the larger and more liquid FTSE100 firms (such as the banks for example) this is not usually much of a problem as the
high volume of shares traded in these companies means that the spread is usually tight and so the cost of dealing is less.
For example RBS may trade at 200-200.2 which means that the spread is 0.2/200 = 0.1%. Nevertheless there is still a spread
and so there is still a cost to the transaction which needs to be adequately managed.

Bear in mind that the spread is also applicable on the sale as well as the purchase so you are paying on the way in as well
as the way out.

When NOT to buy or sell Worst Times of Day/Month/Year

It may seem bizarre but investing at the right time of day can also be
important. Thats why as a general rule we would usually NOT advise
executing any transactions in the first 15minutes of the opening bell
(between 8am-815am).

This is firstly because the market needs some time to adjust and settle
down so that the traders can rationalise the information that has been
released overnight coupled with developments from Asia and the US.
Secondly and equally importantly, there will be a reduced level of volume
traded in the market which leads to reduced liquidity and a much wider
spread.

Similarly during lunchtimes or just before an important figure (e.g. the

first Friday of each month when the non-farm payroll data from the US is
released) there will be a lull in trading activity which once again leads to
a widening of the spread and an increase in your costs.

This even applies to certain times of the YEAR, for example in the run up to the Christmas period traders will be away and
so with bare minimum skeletal desk cover this will once again affect liquidity and hence the spread. Thats why the costs of
dealing become expensive and so you should either entirely avoid this area or invest with caution.

1.8 Opening and Closing Auction

One way of avoiding the wide spread as the market opens is to place an order in the market during the opening auction (this
is BEFORE 8am). This means that you will automatically be filled on your order at the uncrossing price, i.e. the difference
between the best bid and offer when the market opens. In this way it allows you to exit (sell) your position immediately (at
8am) whilst at the same time saving you a lot of money potentially by not having to pay the full spread.

In the same way, this concept applies to purchases and also during the closing auction period (after 430pm).

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
1.9 Direct Market Access (DMA)
Of course just avoiding certain times of the day, month or year to keep the spread down is not really a great solution. After
all, sometimes you may need to execute a transaction and you cannot afford to wait. Other times you may simply not be
aware that the spread is wider than it should be and that you should be avoiding the market at the point of time.

Therefore, there is a much easier solution. At London Stone Securities we encourage investors where possible to use Direct
Market Access (DMA) which means that investors can become a part of the London Stock Exchange (LSE) order book rather
than being spectators. In essence, this means if a stock is trading at 200-202 and you wish to buy, rather than being forced
to pay 202, you are able to place a LIMIT order at 200p so that you effectively join the bid.

This means that now another investor who wishes to sell his/her shares will sell to you at 200p as you are the best bid in the
marketplace. If you now wished to sell your shares you could also do so at 200p (i.e. hence no spread as both the buying
and selling price is 200p).

The risk of this strategy is that the shares go up in price and nobody hits your bid but this is an opportunity cost rather
than a financial cost which is a lesser burden to bear.

Please note that not all trading platforms allow for the use of DMA and so if you do join London Stone, please check with
your broker who can advise you if DMA is available for the products that you are trading and whether it will make a sizeable
difference to your portfolio.

2.0 Slippage
This is one of the most frequent and yet most commonly overlooked costs of dealing because it is the one that is least
visible. At least with commission or stamp duty you can see what it has cost you in black and white on your contract note.
With slippage there is no such luck.

Slippage refers to the difference in price that you should have paid (or received) for a purchase (or sale) of a share and the
actual price that you paid (or received).

The best way to illustrate this is with a simple diagram of the order SIZE BID OFFER SIZE
book, which is available to investors if they subscribe to LEVEL 2. If
25,000 150 152 5,300
you do not already have level 2, and you are a serious investor (i.e.
you manage your portfolio by yourself) then we would recommend 64,500 149 153 2,000
that you use level 2; it is an invaluable tool, costs around 20-30 39,250 148 154 184
a month but can potentially save you thousands a year on your 5,000 147 155 1,890
transactions (depending on how often you invest and in which types 12,800 146 156 36,005
of companies).

What you will normally see (if you dont have level 2) is the bid-
Shares Shares x Price Total Cost offer spread (shown in red and yellow above). However what you
should be able to see in order to make a fully informed decision is
5300 5300 x 1.52 8056 the rest of the table. This is because by seeing the size of the orders
of the prospective buyers and sellers you can gain an understanding
2000 2000 x 1.53 3060 of whether the share is heavily bid or heavily offered. If it is heavily
bid then you should be wary of selling your shares and if it is heavily
184 184 x 1.54 283.36 offered you should be wary of buying.
1890 1890 x 1.55 2929.5 So how does slippage work? If for example you would like to buy 10,000
shares in the above company you may think that you will pay 152.
626 626x 1.56 976.56 Wrong. You will actually pay 152 for only the first 5,300 shares that you
purchase and then the remainder will be filled at the next best bid prices,
10000 15305.42 in this case 2000 at 153, 184 at 154, 1890 at 155 and 626 at 156.

This therefore gives an actual FILL price of However because you will simply see an executed (i.e. fill) price
15305.42/10,000 = 153p on your screen it is most probable you wont even give this price a
second thought under the assumption that you have received the
best possible price.

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
The truth is that yes, you did indeed receive the best possible price for your order; however the problem is that your order
was too big for the market at that moment in time and for that reason you have been penalised by 1p or about 0.7%.

Put it another way, on a purchase (or sale) of 10,000 shares it has just cost you 10,000 x 1p = 100. If slippage is the same
on the closing transaction, this equates to a total of 200, a not inconsiderable sum of money. Of course if you now multiply
this by the number of transactions that are executed over the duration of a year, it becomes easily understood why slippage
is so important to counter. A quick analysis of the costs of dealing (ignoring tax costs, account fees, transfer fees and other
hidden fees etc.) shows the following:

With simple management, the

PURCHASEe SALE above costs can be avoided and
depending on the types of shares
Commission (estimate) 0.5% 0.5% that you are investing in, the
costs could even be considerably
Stamp Duty 0.5% 0 more than what has been
illustrated above. For example,
Spread (estimate) 0.5% 0.5% with less liquid AIM shares the
spread can be as much as 1-2% or
Slippage (estimate) 0.7% 0.7% more, slippage can be 5-10% etc,
so it really does pay to do your
2.2% 1.7% research.

Types of Orders
By placing exit limit orders in the market at varying positions you stand the greatest chance of being filled on one of your
orders. However, if you have mistimed the market and over-estimated how far the share price would reach you can counter
this by using a trailing stop loss which will help to tighten the net around the stock and narrow the worst and best sell
prices on your holdings.

Limit orders, stop loss orders and market orders all have an important part to play as does Direct Market Access (DMA) in
order to eliminate the spread and reduce slippage where possible. As explained and for less liquid shares and particularly
AIM companies further consideration needs to be given as to how best to invest in such companies without adversely
affecting your overall fill price and similarly when exiting, the same must be done again. We estimate that an average of 2%
can be lost per round-trip transaction although this is often not visible as it is hidden within the share price.

Particularly when accumulated over the course of a year this can be the difference between making a profit or loss on your
portfolio and it is our job to ensure that such financial waste is minimised.

Thats why if you are investing your money you need to make a clear decision now whether you are prepared to invest the
time, resource and money to understand the intricacies of the stock market and to then use them to your advantage or if
you wish to use the services of a professional wealth manager or stock broking firm that will be able to do so for you. Many
of our clients will do both sometimes they will follow their own ideas whilst on other occasions they will take the advice
of our traders. By working in tandem, they usually increase their chances of success significantly.

SPECIFIC INVESTMENT STRATEGIES

One of the key market investment strategies that has stood the test of time and remains as popular today as it has for many
years is the CORE- SATELLITE approach. This is where an investors portfolio is split into two distinct sections; 1) an INNER
CORE long term structure surrounded by 2) smaller, peripheral SATELLITE type investments which are more short term.

You can, of course, conduct your own research into this approach and we could encourage you to do so, as it is a common
and widely used strategy that forms a significant part of market investment theory which has been tried and tested over
several decades. It is not suitable for every investor however and depends largely on your own circumstances. Nonetheless
most investors are now reaping the reward for this low risk but effective approach to equity investing.

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
1 CORE
This is the part of the portfolio that should be usually kept for the medium to long term and would generally be the
foundation or building blocks of any investment strategy.

Primarily we would advise a mixture of bonds, money market investments, low-risk dividend paying shares, and diversified
equity funds such as low risk Exchange Traded Funds (ETFs). ETFs would give investors the opportunity to diversify away
large amounts of unsystematic risk which is common with any type of shareholding. ETFs are also preferable to more
conventional unit trusts, investment trusts and other Collective Investment Schemes (CIS) as they provide as much (if not
more) diversification but usually at a much lower cost or Total Expense Ratio (TER).

Conventional managed funds including hedge funds and funds of funds

are usually subject to initial charges, Annual Management Charges (AMC),
and costly exit charges which can drag down their relative performances
in mediocre years. ETFs are on the other hand, do not suffer from these
drawbacks as although there are still charges incurred, they are usually
significantly less; therefore in lean years where returns are modest, ETFs
will usually be the best way forward as they give the lions share of any
performance to the investor rather than the fund manager. Passively Actively
Managed

ETFs also provide flexibility and are available on a wide range of products,
Managed Satelite

indices and sectors. In fact you can be as specific or as non-specific as you Core
like. For example you could have an Emerging Markets ETF which would
give exposure to countries such as Brazil, Russia, India and China (BRIC).
Similarly you could have an ETF with exposure to Europe, the Middle East
or the US. On the other hand you could invest in an I-share ETF which
tracks the FTSE100 index or an ETF that specialises in gold or oil. Flexibility
and transparency are two of its greatest strengths.

The core of the portfolio is also likely to include some exposure to bonds, gilts and other low risk, long term investments.
There are too many variations to discuss here but bonds should be chosen to satisfy your particular investment requirements
including your specific tax position and income/capital requirements. For example there are index-linked gilts, convertible
corporate bonds, short dated and long dated bonds as well as those which have fixed and floating rate coupons. Bonds
provide an excellent back drop to any investment portfolio.

In total, the core portfolio should normally account for around 50-70% of the total portfolio value, but can be more or less
depending on your risk profile and personal investment goals.

2 SATELLITE
The remainder of the portfolio (30-50%) should be invested in satellite holdings. These are direct holdings in individual
companies. This should represent at least 15-20 in number (but no more than 25) to ensure maximum diversification and
to minimise the reliance on any one company or sector.

Whereas the core part of the portfolio would consist of the traditional long term, buy and hold investments, the satellite
part of the portfolio would on the other hand be more short/medium term. To put it another way the core is passively
managed whilst the direct satellite should be actively managed.

In a fluctuating market which is moving sideways and is neither a bull (rising) or bear (falling) market, it pays to trade the
volatility i.e. to actively manage the investments by selling the market or individual share price as it reaches the top of its
technical range. In effect this means making a judgement (on the basis of previous historic information) as to the maximum
price that a particular share is likely to rise to and then subsequently placing (limit) orders in the market at those levels.

There are also a wide range of exit strategies possible, including for example selling half of a holding at one price whilst
working another order to sell the remaining half at a higher price; alternatively you could just sell your whole holding at one
price or instead you could even use a trailing stop loss order to exit thereby maximising any upside potential. Whatever the
exit strategy, the re-purchase is usually executed by placing a corresponding order to buy back the same shares at a lower
price (usually at least 10% below the sale price but could be more depending on the volatility of the share in question).

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
By trading the volatility, small but consistent capital gains can quickly accumulate on your account which helps to boost
the overall yield on the portfolio. Conventional market theory suggests that investing for capital appreciation is a higher risk
strategy than investing for income but many analysts now argue that it can actually be construed as lower risk, depending
on the specific market conditions.

Why can it be lower risk? Well, because by the very nature of a capital growth strategy your portfolio will at times be in
CASH rather than invested in equities at all times. If this period of time(s) coincides with a sharp sell-off in the stock market,
this will undoubtedly save you money. In this respect, by fluctuating between equities and cash it is a lower risk approach
than being always invested in the market. Bear in mind also that the actively managed part of the portfolio usually focuses
on a lower % of your overall portfolio, and as you have full control of what this split should be between active and passive
management you can effectively dictate the relationship between the different levels of risk.

The only disadvantage of being in cash is if the market is in a clearly defined BULL run (i.e. a succession of higher highs and
higher lows) as we saw in the second half of 2009 and 2010. In this case it would pay to be fully invested but as we can see
in the current economic climate, very few investors believe that we are in that situation today. Thats why it is so important
for the strategy that is employed to mirror the underlying market conditions at that point in time. It is also imperative that
investment strategies are adapted and changed in the face of changing conditions.

Therefore, if there is an expectation that the market is over-valued and is due for a significant correction (market fall),
successful investors will often make the decision to increase the % of their active portfolio in relation to their passive
portfolio. Hence they may chose to move from an 80:20 core-satellite split and adopt say a 30:70 approach. This is because
there is; (1) less expectation of large profits by holding shares for the longer term and (2) the longer the period of time that
one holds shares, the greater the risk that this will coincide with a market fall (i.e. it pays to be in cash).

SO WHAT SHOULD YOU DO NEXT TO IMPROVE YOUR PORTFOLIO?

Once you have established the main framework of the core-satellite portfolio, there are many different strategies which
could be incorporated when managing your portfolio, to ensure optimal performance. Some of these have already been
touched on above but are explained in more detail below:

Tax Wrappers
The first thing to mention is that given how much work is involved in picking the right stocks and then being disciplined
enough to follow and evolve your investment strategy, it obviously makes sense to protect your hard-earned gains. One of
the major costs that could be eliminated or mitigated is that of taxation.

Thats why before you begin investing you should consider your tax position and your financial circumstances so as to
ensure the maximum amount of your return goes into your pocket and not to HMRC. There are a number of simple
and effective options including Stock ISAs, SIPPs, joint accounts, offshore accounts, limited companies, EISs, VCTs, trusts,
charitable donations and so on. There are even tax benefits to holding particular types of shares such as AIM companies
which allow investors to eliminate certain inheritance tax liabilities. So the first thing to do is to talk to a financial/tax
advisor and to make sure that you are utilising your full allowances and in the most effective manner.

Cash & Equity Switching

The second main point is recognising the importance of sometimes being in cash, something which is often overlooked by
many fund managers and brokers, is the importance of this fundamental concept.

Part of the reason for this is due to the fact that because cash attracts such appalling rates of return at current levels of
interest rates, the strategy of holding cash for any prolonged period of time can adversely affect the annual return on a
portfolio. That said, this is a small price to pay as it is without question wise to be in cash at least for some of the time and
particularly when there are wider and far-reaching concerns about the state of the global economy. However being in cash
is a strategy to be used only in a volatile or falling market i.e. in a rising (bull) market the core-satellite should be 90:10
(minimum cash element).

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
Certainly in the current market climate, it would make sense to take profits when they are there and to stay in cash at least for
some of the time. By doing so you will reduce the overall risk of your portfolio (cash is assumed to have NO risk for the purposes of
this document) and by selling those companies which are unlikely to rise in price any further, you will reduce the overall risk of the
portfolio by having less invested in the market whilst at the same time earning the same return from the remaining investments.
Therefore this will improve the return to risk ratio which in turn leads to an increase the overall yield of your portfolio.

High-paying dividend companies should not be sold for 2 reasons: (1) They offer a yield and so any fall in share price would
reduce capital gain but still offer an income stream and (2) they are generally low beta companies and so are likely to fall
less in the event of a market downturn.

Of course we would rarely recommend that your portfolio should ever be completely in 100% cash but to have 50% in cash
at the right time (or more depending on how high the market is at any point in time) is certainly a very powerful strategy
that we would strongly recommend that you use.

High or Low Beta Companies

And so if you are in agreement that it makes sense to
sometimes be in cash at least sometimes the next question
must be, which stocks should I sell? The answer to this
question is quite simple.

Firstly, you should only be looking to liquidate part of your

portfolio if you genuinely believe that the market is over-
valued and you should only sell those shares which have
a high beta i.e. those shares which are likely to fall more
quickly and dramatically than those companies which are
more defensive and have a low beta.

You can find the value of betas for your individual holdings on the internet quite easily and so you can see how risky or
volatile your portfolio is by calculating the average weighted beta (AWB); anything above 1 is generally regarded as risky
whilst anything less than 1 is regarded as defensive.
These are also very often the dividend paying companies because by definition, a dividend stream gives income and this
helps to stabilise any losses in capital. It also provides share price underpinning (i.e. the yield increases as the share price
falls thereby attracting investors helping to support or underpin the share price). As a result, dividend paying (low beta)
companies will not usually fluctuate in price as dramatically as non-dividend paying companies.
Mining, oil and gas, banking, telecoms and technology companies will usually have high betas whilst utilities and pharmaceuticals
will generally have low betas. Therefore at the top of a market range, you should hold perhaps 50% of your satellite holdings
in defensive companies (which equates to 15% of your total portfolio with a 70:30 core-satellite split).
Conversely, when the market has bottomed out and it looks as though we are due for a recovery or stock market bounce,
it pays to be more a little more adventurous and buy back into high beta companies as these are the investments which
will rally the quickest and most aggressively in any market upturn.

Overseas Exposure
It is usually advisable to have some exposure to non-UK investments to diversify the risk of the UK economy, although
a maximum overseas exposure of 5-15% is usually all that is required. Of course investing in companies abroad is not
without its own risks but if you focus solely on the FTSE100 equivalent (i.e. the most established, low risk shares in overseas
exchanges), the risks would be relatively low and overall the reduced risk from international diversification will more than
offset the heightened risk from investing within the international markets.
One of the biggest disadvantages when investing in overseas companies is often cited as being currency risk and depending
on the country, there may be increased geo-political risk. However currency risk can be easily managed through the use
of currency futures which are relatively simple to implement. Geo-political risk can be also be managed through adequate
research and in fact you can use this to your advantage through buying investments which are relatively cheap due to the
fact that they are positioned in politically sensitive parts of the world (for example, in many parts of Africa).

The costs of trading may also be more prohibitive but as overseas stocks should form part of the long term portfolio, this
is a not a major factor that needs to be taken into consideration.

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
Property Investments
Another excellent method of diversification is to invest in property
and specifically to invest in property ETFs which is an increasingly
popular method of gaining exposure to bricks and mortar without
having to tie up your capital in buying a physical piece of property or
land. This method obviously has significant advantages to physically
buying a house and allows your capital to remain largely liquid
which in turn gives you greater freedom to switch from one type of
investment to another.

Another form of property investment is through the purchase of

Real Estate Investment Trusts (REITs) which are stock market listed
property companies. However these companies specifically will look
to focus primarily on the rental market rather than development
market, which means that the risks of investing is much lower
although the gains can be just as great. Strict regulatory guidelines
dictate favourable conditions for investors which help to ensure a
steady stream of income.

Furthermore it is now apparent that the rental market continues to remain

buoyant (irrespective of falling property prices) and so this is a great way to
maximise your income, gain exposure to the UK rental market and diversify
your portfolio with minimum hassle and cost. It also allows you the option
to liquidate quickly and go back to cash in the event that the rental market
begins to cool off (however unlikely that may be).

Some of the regulations imposed on REITs include the company behind it to invest in a minimum of 3 properties and to
ensure that no single investment accounts for more than 40% of the total portfolio. Also REITs must pay to shareholders
a minimum of 90% of their earned rental income! Thats a great deal if you are looking to boost your long term income
plans.

Dividend Yielding Investments

Dividend paying companies are attractive to investors for obvious reasons. For a start, it usually suggests that the company
is doing well enough to be able to distribute part of its profits to its shareholders which means that the risk attached to it is
likely to be less than similar non-dividend paying companies. However one of the best reasons to invest in good dividend
paying companies (and as touched upon earlier), is the fact that company share prices are usually underpinned.

To illustrate; imagine company ABC pays a dividend of 10p per share and the share price is 200p; this would equate to a
dividend of 5% (=10/200). If however, the share price fell to 100p, and assuming that the dividend remains unchanged, the
new dividend yield would equate to 10% (=10/100). An increased dividend yield would attract investors keen to capture
the higher level of income return and particularly if the company is a blue-chip FTSE100 company, it would undoubtedly
attract the interest of pension fund managers.

Therefore by investing in dividend yielding companies there is an extra level of support which is not present in companies
that do not pay dividends. Indeed many fund managers will now run electronic algorithm trading models which show and
automatically buy shares in companies once they fall to a price which would trigger a specific % yield. For example if Aviva
falls to say 270p this could give a yield of say just under 10% which would trigger a chain of automatic limit orders to buy
the stock at this price which in turn is likely to result in the share price rallying.

Dividend Cover
Of course you cant just look at the dividend alone. Indeed, you do have to be a little bit careful about choosing companies
solely for their dividend as companies which are subject to a significant fall in share price; an example of this would be
Thomas Cook. This is because in the short term it may appear as though the company is paying a very high dividend
yield (20%) although in reality the dividend is not covered by the profits of the company. What this means is that the
companys management team must make the difficult decision on whether it maintains the dividend (by drawing on the
firms Retained Earnings Reserves (RER) or if it cuts the dividend. Either prospect has its drawbacks.

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
Remember also that the financials of companies (such as EPS, PE, Capital Cover, Interest Cover etc.) are all based on
HISTORICAL information i.e. it is based on the firms last set of published accounts. In some cases that could have been
many months ago and a lot may have changed since then which is why some appreciation as to how the company has
performed since its last set of results is also important. If for example the company had a high level of earnings (profits)
6months ago but since then it had suffered a number of setbacks (e.g. loss of major contracts, rising material prices,
employee strikes etc.) its very likely that the earnings figures that you are working from are not representative of the
company today. However there are also ways and means in which approximate calculations can be made to estimate the
true and current EPS valuations today which are the figures that you should therefore work from.

A quick and easy method to check whether a dividend is justified and all importantly whether it will be upheld at the next
payment date is simply to check the dividend cover. A dividend cover of at least 2 is usually advisable which suggests that
from the last set of reporting profits (earnings) the dividend could have been paid at least twice over. This therefore gives
you the added assurance that even if the company suffers a 50% reduction in its profits next year, it should still be able to
maintain its original dividend without drawing on its reserves.

If a dividend cover is less than 1, you should be concerned as a company may be unable (or unwilling) to pay a set dividend
which will not only affect your income payments but more importantly could have a significantly detrimental impact on
the share price, thereby impacting your capital investment in the company. However in the case of more established
companies that have large amounts of cash reserves in their Retained Earnings account, this is less of a problem as it is
likely that even if the profits for a particular year fail to cover the proposed dividend, it is usually unlikely that the corporate
management team will risk the wrath of shareholders by cutting a dividend when they are capable of paying it (albeit from
its reserves).

Conversely, its sometimes worthwhile looking to invest in companies which have a dividend cover of 4 or 5 because if
this level is maintained for a number of years, shareholders will usually demand that these profits be used wisely and that
can either take the form of investment in land, acquisitions, factory space, marketing etc. or alternatively investors would
expect for these profits to be distributed in the form of higher dividends. (There are distinct disadvantages to simply just
building up the reserve account which the management team will be aware of and shareholders will pressure firms to
therefore put these funds to better use).

Corporate Restructuring
Furthermore and by looking at a companys balance sheet and assessing the dividend cover and level of retained earnings
you can often identify those companies which are most likely to engage in corporate restructuring such as offering a
discounted rights issue to shareholders or a share buy-back where the company uses its growing cash reserves to buy
back shares from investors, resulting in fewer shares in circulation which in turn leads to an uplift in share price. Similarly
companies will often issue special dividends like Vodafone did in 2012.

Whatever the case, its imperative that only companies with strong
balance sheets are invested into as this is what will give you the best
possible chance of an increase in the performance of your holdings.

Gold/Safe Havens
During the current market climate where there is still a large amount
of economic uncertainty, safe haven plays such as gold (and to a lesser
degree other precious metals) will always attract interest. Gold remains a
staple investment for any portfolio although purchasing physical gold has
its own problems and costs involved due to storage and insurance. Once
again Gold ETFs are probably the best way to gain exposure to gold.

Other safe havens include the Swiss franc as has been demonstrated
in recent years and this is a relatively inexpensive strategy to employ
although some consideration should be given to the fact that if it is kept
in cash, the rate of interest achieved on most money market vehicles
are pitiful at the present time. Thats why it would be better to buy
shares in large-blue chip Swiss companies which have strong dividends
and are low risk as an alternative, or Swiss-denominated bonds of
course.

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
Takeover Targets
Another way of ensuring that as an investor you are at the right place at the right time is to identify and invest in companies
which are trading below their Net Asset Value (NAV), or in other words the share price of a company is below its break-up
value. By doing so you expose yourself to the best of both worlds; firstly that the share price is likely at some point to recover
as the share price of a company in the long term should always gravitate to its true value, and secondly your investment
should become attractive to potential bidders (assuming there are other synergies) and any bids almost always will come in at
a price above the NAV to convince shareholders to give up their shares.

Spread Investments
This is a fairly recent phenomenon but is being used to great effect by many
investors now. It is usually executed during the mid-range of the underlying
index (i.e. when the FTSE100 is in the middle section of its defined trading
range). The reason for this is that it allows profits to be generated on a
portfolio irrespective of the overall direction of the market.
It works simply by identifying two companies in the same sector that
usually maintain a fairly consistent distance between themselves in price.
Once this price either narrows or widens there is an opportunity to exploit
this anomaly. For example; if company A and B are competitive firms in
the same sector with company A usually trading at 200p and company B
trading at 180p, the spread is 20p.
If however (and VERY importantly in the absence of any corporate news from either company) this difference in price
extends to say 40p (i.e. A goes to 230p and B reaches only 190p), there is a possibility that the spread will revert back to
its original 20p. Investors can then SHORT A whilst simultaneously taking a LONG position in B in the hope of a tightening
or narrowing of the spread.
This is a low risk approach as it is non-directional i.e. the direction of the overall market is irrelevant as you are interested
in only the spread. It is important however to close out both legs of the trade at the same time as the common error in
application in this strategy is to close out only the profitable leg and allowing the losing leg to continue to run in the hope
of securing bigger profits.
Spread trading can be used with two, three or more individual shares and is particularly profitable with banking and mining shares.

Range Trading/Investing
In a non-directional market, range trading can be an effective method of investment/trading as it ensures that small, consistent
gains are continually added to your account. The range of any stock or index is established by its support and resistance levels
and is subject to the self-fulfilling prophecy concept i.e. the greater the number of investors who believe that a particular
share will increase in price and so therefore buy that share, ultimately leads to that share increasing in price!
Therefore the herd mentality of investors usually does all of the hard work for you. Ranges will typically last for a few
months and so its important to use them not at the beginning or the end but in the centre where the risks of investing
are least. Caution should also be observed with breakouts and false breakouts.

Technical Analysis
Technical analysis (TA) is fast becoming the professionals method of investment choice and cannot now be ignored by
private investors if they wish to stay one step ahead of other market participants. Quite simply technical analysis refers
to the analysis of the historical price action of a particular share with a view of using that information to predict future
movements. It is widely used by stock brokers, fund managers, financial institutions, banks and professional traders, as
such, we feel that at least a basic appreciation of TA is needed by all investors today.
One of the biggest advantages of TA is that you do not need to try to predict human behaviour which is usually difficult to
do as it is irrational. Instead you have to simply follow the trend i.e. if a company posts results which are positive but come
in slightly lower than were expected it may be difficult to know how to react to that situation i.e. do you buy or sell?
With technical analysis this doubt is removed as you no longer need to make that decision; from the price action depicted
on the chart you can see what the majority of investors have decided and you simply go with the majority.

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
Fundamental analysis
Is the traditional way of valuing shares and ultimately in the long term, the share price of a company will always gravitate to
its true value. Therefore for the long term investments (passive CORE portfolio and passive/defensive SATELLITE holdings) a
greater emphasis is generally placed on fundamental analysis (FA) whilst for the more active/high beta SATELLITE holdings,
focus should be more towards TA.

Wherever possible you should aim to bring fundamental and technical analysis together, which will often significantly
improve the performance of any investment decision.

Value & Momentum Investing

Value investing refers to looking for value; i.e. bargains. It usually involves identifying and purchasing shares which have
fallen considerably in recent months in the expectation of a turn-around in the companys fortunes. However the common
mistake many investors make is to buy this investment as it is falling. Many independent research studies show that if a
share price has fallen by more than 20% it would make sense NOT to buy the shares as they fall. This is because the risk
of doing so is much higher than allowing the share to begin its recovery. The phrase dont try to catch a falling knife is
often used to explain this situation and investors who trade in this way are known as contrarian investors (i.e. they act in a
contrary fashion to the majority around them).

To the contrary, you should allow for the share price to begin its recovery, before entering into the purchase. The downside
to this approach is that you will achieve a slightly worse fill price (increase in X %) but the advantage is that the risk of the
investment is greatly reduced (reduction in Y %); provided that Y > X, it was the right investment decision.

On the other hand, momentum investing is the exact

opposite. In this situation you are looking for the trend
to be your friend or put it another way, you are buying
into strength and selling into weakness. This is a lower
risk approach to value investing but as is always the
case with any investment strategy, it is determined by
the underlying market dynamics. In a side-ways moving
market, (i.e. not a bull market), momentum investing
has severe limitations and so value investing would
be favoured instead. However in a directional market,
momentum investing would be superior.

There is much discussion about value and momentum

investing and which is the best technique. The truth
is that it is very much like technical and fundamental
analysis, whereby they are not mutually exclusive and
indeed each has its own place in investment theory.
The important thing for investors is to understand when
each theory should be applied. Usually most investors
are static in their approach and will apply only one
model which as you would expect only therefore works
half of the time.

FTSE 100 & 250

FTSE 100 companies ultimately give a greater level of international exposure as although the companies are listed on the
UK exchange, in most cases the companies will have a significant element of overseas operations. Therefore by investing in
the leading UK firms, you are diversifying away further some of the risk associated with those investments.

FTSE 250 companies on the other hand are more domestic based and therefore there is a greater sensitivity to the UK
economy which in turn is likely to have a larger impact on your portfolio.

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
AIM
The Alternative Investment Market (AIM) is generally a more risky market than either the FTSE100 or FTSE250. This is
for a number of reasons such as the companies quoted on this exchange being generally less established and smaller in
size. However the fact that they are on a smaller exchange means that they will not be as actively traded by investors,
particularly pension fund managers who are restricted in how much they can invest in the AIM market.

As a result of the lower volume of shares that exchange hands in

such stocks, the shares will generally be less liquid which in turn
results in a wider bid-offer spread. This means that the cost of
dealing becomes more expensive and therefore you should avoid
too many deals; or put it another way you should try to invest
in the AIM market for the longer term as they are not usually
suitable for short term trading.

You should also have a different risk to return profile for such
companies i.e. with FTSE100 companies you may look to make
10% profit by risking 5% (so a 2 to 1 return to risk ratio). However
as AIM companies are more risky it would make sense to try to
capture a bigger return, say 30% by risking 10% (a 3 to 1 ratio). Of
course this rule doesnt apply to all AIM shares as there are 2,000
in total and so some of much higher risk than others. Similarly
it doesnt always follow that the bigger the company the lower
the risk although its a reasonable starting point for any piece of
analysis.

There are some tax advantages to AIM shares (such as exempt

from Inheritance Tax after 2 years from the date of purchase),
although you cannot put AIM shares into a stock and shares ISA.

Financial Management
The financial management and discipline to any investment strategy is absolutely critical because as you are now aware,
investing in equities (or any other product) is about the relative relationship between its potential return and associated
risk. Therefore it would stand to reason that if investments have different levels of risk (which of course they clearly do) the
potential return on each of those investments is also likely to be different. Consequently, in order to stack the cards in your
favour you need to be able to recognise which stocks represent the highest level of risk and therefore which should yield the
greatest level of return.

There are a number of ways in which you can analyse the risk and one factor which we have discussed already is beta
(volatility). However other factors also come into play such as the share price spread, volume of shares traded, on which
exchange, which sector etc. as well as fundamental information such as the companys cash reserves, PE and EPS ratios,
dividend yield, the management team, order book, competition, international exposure, goodwill/reputation and so on.

A common mistake that is often made by private investors is that in the same way that they will maintain the same
investment strategy (i.e. usually long term buy and hold) irrespective of market conditions, they will also usually regard all
investments alike. Therefore an investment in Severn Trent (a FTSE100 utility company low risk) is regarded in the same
way as an investment in Gulf Keystone (an AIM oil and gas exploration company high risk). This leads to a breakdown in
the critical return to risk ratio that is so important when building a portfolio.

Financial Discipline
The term Financial discipline refers to an investors ability to be disciplined enough to buy or sell (close) a position at the
right time. So the next question is when is the right time? In fact the right time is not actually a time at all but at a pre-
defined price. Put it another way, whenever you enter into an investment you should know before you make that purchase,
your exit strategy. That means you should know TWO key exit prices; (1) the exit price if the shares perform badly (this is
your STOP loss order) and it protects you from substantial losses, and (2) the exit price if the share perform well (this is your
LIMIT order) and it means that the shares will automatically be sold at a particular price.

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
By having both a stop loss and a limit order you will hopefully
be able to sleep a little easier at night with the knowledge
that you know your best and worst case scenarios on the
investment. Therefore you could have a stop loss and limit
order so that you may lose a maximum of say 10% or you
could make a profit of say 20%. Thats why we think that
its important to have your exit strategy at the time that
you make the purchase and NOT after the time of purchase,
because invariably that is when your judgement will be
muddied through what has happened since the purchase
was made. If the shares have done well the human emotion
of GREED rears its ugly head and you will of course expect
your shares to go even further; therefore you are now
placing an unreasonable demand on your investment which
may never materialise.

Similarly, if the shares fall in value most investors make the cardinal mistake of convincing themselves not to sell as the
shares in the belief that they will recover (which they sometimes although not always and if they do its usually after a
prolonged period of time (several years) during which there is zero yield to you as the investor).

On the other hand investors may feel a largely irrational emotion of FEAR in the event that the market has bad news and
there is a sell-off in equities. What happens is that investors start to dump shares expecting the market to collapse whilst
all the while, it is the professional investors who are shorting the stock to shake the tree i.e. to frighten investors out of
the positions prematurely so that they can reverse their short positions and buy up the released stock.

Thats why its so important to take the emotion out of investing because human nature is hard if not impossible to
predict (different investors will react differently to the same piece of market news) so the best advice is have your game
plan BEFORE you invest and stick to it. The only time you may be wise not to, is if since making the purchase investment,
there has subsequently been either specific corporate or general sector/market news which would have lead you to have
changed your initial view. However nine times out of ten it would make sense to stick to your original game plan.

Shorting
Shorting generally carries with it images of very high risk derivative trading. However it is simply a trading strategy which
can be used to take advantage of falling share prices. Therefore if you felt that the market is over-valued (and therefore you
have a % of your satellite portfolio sitting in cash) you may not necessarily want to simply wait for the stock market to fall
before buying. Instead you can SHORT a particular share (or even the overall index) which means that you effectively sell
something that you dont own which you can then hopefully buy back later at a lower price.

It does NOT need to be high risk. The risk associated with shorting comes from the amount of leverage or gearing involved
and so it can be as high risk or low risk as the investor wishes.

Another use of shorting is to HEDGE an existing portfolio. For example if you have a 100,000 portfolio but you are unsure
about the direction of the market you can short the index so that it acts as an insurance policy against the market falling in
value. In this case using derivatives actually REDUCES the overall risk of your portfolio.

That said, shorting is not for everybody and you do need to understand the risks before proceeding. If you would like to
receive more information including numerical examples of how it works in practice, please let us know.

Stock ISA and Self Investment Pension Plan (SIPP)

Investing in the market is difficult enough without having to worry about your tax implications. Thats why at London Stone
Securities, we actively encourage our clients to utilise the tax efficient vehicles available to them. There are a number of
them but the most common are stock ISAs and SIPPs.

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
 ADAPT YOUR STRATEGY TO THE MARKET

The stock market and investing in general can be as complex or as simple as you wish to make it. Any number of variations
and connotations are possible and so there is no holy grail. The truth is that as the market is essentially a zero-sum game
(i.e. for every winner there is a loser), and therefore clearly there must be some strategies which work whilst others do not.
It is also important to recognise that the same strategy rarely works over long periods of time which is why its necessary
to adapt and change tact according to changes in market dynamics.

What history has also shown us is that those investors who are prepared to adapt and change to the market circumstances
will reap the greatest rewards. Thats why youll find that most private clients, without professional help, will go through
peaks and troughs in terms of performance as they are right approximately only 50% of the time (as they tend to execute
the same type of strategy irrespective of market conditions). What this leads to is a typical cycle where profits will be made
for a period of time (X number of years) and then losses will occur during other periods of time. On average therefore the
gains are usually modest over the long term and in some cases will not even beat the level of inflation for the period of
time under consideration.

Furthermore justification for these losses are all too common place as investors will often cite bad market conditions for
the relative poor performance of their portfolios during these lean years. However the truth is that it is not the market to
blame but the fact that the strategy applied to it was the wrong one.

With the use of derivative investment tools where investors can make just as much money (if not more) in a falling market
as in a rising market, there really is no excuse not to make profits consistently year after year, but ONLY if you adapt and
change your investment strategy to suit the market. For example; this could mean shifting between long term investments
to short term, or it could mean switching from fundamental analysis to technical analysis, or from value investing to
momentum investing, or moving from a fund/passive strategy to a satellite/active strategy or so on. There are many
strategies not described in this report which may also become applicable in the future which is why you need to constantly
evolve and develop your technique.

Illustration of why adapting your strategy is so important

To illustrate the importance of being flexible in style of your investment
strategy, think back to before the 2008 banking/financial crisis when
the first signs of a meltdown were witnessed (think queues of people
lining outside Northern Rock to withdraw their savings). However
and despite the severity of the unfolding situation, most investors did
not sell. Why? Because 90% of investors follow a long term buy and
hold strategy irrespective of the market conditions. If shares fall in
value the common response is They will come back, Im a long term
investor. With hindsight we can see clearly now that this approach
was and continues to be a mistake.

However fast forward to the all-time low of March 2009 and suddenly
being a buy and hold investor was absolutely the right thing to do
because in the next two years we witnessed an incredible period
of sustained growth where many blue chip companies increased in
value by several hundred percentage points. So you see under such
market conditions it made sense to be a buy and hold investor.

The important thing to recognise is that if you did nothing with your portfolio (and with the exception of the banks), you are
probably broadly back to where you started before the crash. However with a bit of preparation and active management
your portfolio could have been worth significantly more.

What happens next?

Clearly the market moves in cycles and so dont despair thinking about what could have been if only you had sold before
the crash and bought again after it. After all, hindsight is a wonderful thing and to talk about events after they have
occurred is a fairly easy exercise.

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
However it is without doubt with the continuing problems faced by Greece, Spain and Italy and the possible future
breakdown of the euro (or at least a breakaway of the Northern European countries) it is highly likely that we will see
another significant sell off in equity prices at some point in the next year or two. What will then follow is what always
follows.

The market will fall, fall some more, and then perhaps fall even more. This will mean that profitable companies with bulging
assets will begin to build up large reserves of cash which will be reflected in the balance sheets. This in turn will have the
impact of raising the Net Asset Value (NAV) per share to a point where the discount will represent such an opportunity
that professional fund managers will not be able to turn away. The risk of investing at this point is minimal because the
break-up value of the stock could be as much as two or three times the value of what the underlying share price implies.
Therefore in the worst case scenario and if the company was to go bust, the distributable assets would cover your share
holding and largely guarantee your investment.

In addition, as valuations become ridiculously cheap, dividends from cash rich companies are likely to at least be maintained
which will push up the yield to unrealistic levels (10%-15%), which in turn will attract investors in their droves. This will have
the effect of stabilising the market and there will subsequently be a period of time (usually anything from a few weeks to a
few months) where there will be a tug of war between the buyers (bulls) and the sellers (bears) which will have the effect of
a flattening of the share price (also known as a saucer bottom). It is at this point that you should be looking to re-enter the
market (after having sold and gone into cash previously of course!). What will follow is an inevitable sharp recovery in price.

Bear in mind however that for the above strategy to work, you should target only the safe, blue-chip investments which are
profitable and continue to post good profits. Unfortunately this will tend to be the low-beta companies, (which is at odds
with the strategy of buying high volatile companies on a market low) but after a severe sell off in the stock market (not just
the bottom of the technical trading range) it makes sense to apply caution when re-entering the market. Besides after a
significant collapse in equity prices even the low-beta companies will show sharp returns.

Alternatively, for those who are prepared to take a riskier high-beta investment approach, the returns can be quite stunning.
Take a look at the table below at a number of household FTSE100 names, albeit with high betas and see how the share
price moved over this period of time.

BUY AND HOLD STRATEGY DOES NOT WORK

% Annual
March 2007 March 2009 % Increase
Increase
Banks RBS 675 19 -97 -49
Barclays 720 74 -90 -45
Resources Vedanta 1250 530 -58 -29
Xstrata 2360 325 -86 -43
Rio Tinto 2680 1825 -32 -16

BUY AND HOLD STRATEGY DOES WORK

% Annual
March 2009 March 2010
Increase
Banks RBS 19 40 + 111
Barclays 74 340 + 359
Resources Vedanta 530 2690 + 408
Xstrata 325 1190 + 266
Rio Tinto 1825 3700 + 103

Furthermore we have deliberately not taken the best scenarios. For example RBS did actually fall as low as 8p and did
increase in price to far beyond the 40p but we have not taken this as our reference point so the return (had your timing
been better), would have in fact been much larger than the one illustrated above. However without taking the extremes of
each case, it adequately demonstrates that those investors that were prepared to change their strategy from short term to
long term when the market required them to do so were the ultimate winners.

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
Varying Market Conditions
The main point to recognise here is that different market conditions call for different trading strategies and by being open to
change and adapt to any situation, you can always ensure that you and your portfolio are ahead of the investment curve.
If you are always a long term investor or always a short term day trader you only ever capture half of the picture and whilst
you should (in the very long term) make a modest gain (between 2-5% annually) this is a fraction of what is achievable
if you are prepared to invest some time and effort to really taking care of your portfolio and changing it according to the
market conditions at the time.
Of course we recognise that not everybody has the time, inclination or indeed experience/knowledge to want to change
their portfolio or to even adapt their investment strategy, and thats why at London Stone Securities we offer the service
that we do.
We hope that you found this document informative and useful for your purposes and if you did, we would welcome
the opportunity to turn theory into practice for you and your portfolio. Please remember also that there are varying
strategies for all types of investments and portfolios and so it may be the case that one, two or any combination of the
aforementioned strategies might be right for you.
Whatever the case, a review of your current portfolio and an informal discussion of your investment aspirations will give
you a better picture of where you are now (point A), where you want to be (point B), and of course all importantly, how
you can get from A to B.

CONCLUSION

Despite the detail described in this report there are still a plethora of investment ideas and strategies that have not even
been touched upon. The market is after all a vast and intricate place and whilst most private investors are prepared to put
their hard earning savings (and in the case of pensions, quite often their entire life savings) into the stock market, nearly all
are not as fully aware of the options that are available to them, as they really should be.
However, the basic steps of investment are clear, they should be followed by everyone, and are as below:
1. Understand your investment objectives and ensure that you have chosen the right risk profile for you and your familys
circumstances. This should take into account (amongst other things), your financial status/investable wealth, tax
position, age, and short term and long term goals.
2. Choose the investment products which will allow you to satisfy point (1). For example; if you are a long term investor
looking for dividends, CFDs are not appropriate for you. If on the other hand you are a higher rate tax payer, stock
ISAs and SIPPs could be the way forward for your dividend paying companies whilst your non-tax efficient vehicles
(i.e. normal nominee trading account) should house those investments which focus on capital appreciation. (This is
something that the Government already encourages through the prohibition of holding AIM stocks within an ISA).
3. Ensure that you use a system that will minimise your costs, eliminate/reduce the spread and slippage, offer you
the most favourable commission rates and will take advantage of any market anomalies whenever they present
themselves. Then research the shares using both fundamental and technical analysis techniques to improve the
probability of success.
4. Introduce two main threads to your portfolio, a core and a satellite; use passive and active strategies respectively
in their management. Introduce an exit strategy at the time of purchase (using limit orders) and make that you are
financially disciplined to follow it.
5. Follow the market closely and understand the wider global economic and political picture. Recognise that any given
strategy will only work HALF of the time which is why you need to adapt your approach according to the current market
conditions. For example after a significant collapse in the stock market (such as that witnessed in 2007/8) it pays to be
a long term investor but after a prolonged rise in the stock market, it pays to take a more short term approach.

For a more detailed conversation of what would work best for you and your specific circumstances, please feel free to make
an appointment to see one of our advisors at our City offices.

Thank you for taking the time to read this report and we hope that it will serve you and your investments well in the future.

London Stone Securities

Research Team

T: +44 (0) 20 3697 1700

F: +44 (0) 20 3697 1708
E: [email protected]
London Stone Securities Limited is registered in England and Wales, No: 6464964.
Authorised and regulated by the Financial Conduct Authority, No: 479827 W: www.londonstonesecurities.co.uk
London Stone Securities Limited

T: +44 (0) 203 697 1700

F: +44 (0) 20 369 1702
E: info@ londonstonesecurities.co.uk
W: www.londonstonesecurities.co.uk

London Stone Securities Limited is registered in England and Wales, No: 6464964
Authorised and regulated by the Financial Conduct Authority, No: 479827