Investing in ‘loose’ shares? With these three tips you can limit the risks

taketonews

When Tom Steenstra (24) started investing, he just did something. “I stumbled into it through a buddy and started with crypto – bitcoin and ethereum.”

He made a profit of 100 and 50 percent respectively. That tasted like more. When he had sold his crypto, he switched to ‘loose’ shares – of individual companies – that were hyped on social media, such as BlackBerry and Game-Stop. “I thought the price would continue to rise,” says Steenstra, student of marketing & communication at the Amsterdam University of Applied Sciences. But when this so-called memeshares quickly fell in value on the stock market, he went for 2,000 euros – tough for a student. “Then I realized: this is bullshit, these shares have no basis at all. For example, GameStop had a lot of debt and little real value.”

It wasn’t just beginners who hit their heads at the stock market last year. Take Janneke Willemse (48), a veteran of the investment world. As a presenter of all kinds of investment programs at RTL Z, she has interviewed every equity analyst at some point. Since she started the blondjesbeleggenbeter.nl website in 2013, on which she reports on the ins and outs of her portfolio in individual shares, her return has been high: an average of 15 percent per year. Until 2022: then she lost 14,795 euros on the stock exchange, a minus of about 20 percent.

Like Willemse and Steenstra, many private investors fared last year. And so far the malaise continues and the price of many shares is falling. Those who own single stocks will often have lost more than those with safer investments, such as mutual funds or ETFs – a publicly traded ‘basket’ of stocks or bonds.

Nevertheless, Dutch citizens love loose shares: a third of all their invested money is in them, worth 51.7 billion euros, according to figures recently published by De Nederlandsche Bank. If you are one of those estimated two million investing Dutch people, how can you limit your loss on individual shares? Three hints.

1 Spread your money

With individual shares you run much more risk than with an investment fund – especially if that fund does not contain one type of stock, such as technology or banking stocks, but companies from as many sectors and countries as possible. Simple: this way you don’t bet on one or ten horses, but on hundreds at the same time. There are even funds with more than 5,000 different stocks. If a few of them collapse, your loss will be much less dramatic, even in bad stock market times.

But the appeal of individual tech stocks, for example, of exciting companies such as Tesla or Apple, is greater than a fund with a dozen names in it that you don’t even know all of. Hans Oudshoorn, who advises wealthy investors at Saxo Bank, saw it with a friend. “He had put all his money into a few tech stocks, despite my warnings. Last year half of the value evaporated. Yes, that hurts.”

If you need the proceeds from your shares for your pension, diversification is absolutely important. That is not the case with Janneke Willemse of blondjesbeleggenbeter.nl: she has – sensibly – ETFs and annuity products for that. As a result, she can afford more freedom with her individual shares. “I got it because I like to follow some of the companies I believe in and see if the scenario I wrote for it comes true – it’s part game.”

Read also: Is there a grain of truth in well-known tile wisdom about investing?

Nevertheless, Willemse also considers diversification important in her ‘blonde portfolio’. She agrees with Oudshoorn, who advises spreading the investment over at least 10 to 25 different stocks.

Tom Steenstra has also become convinced of the importance of diversification. Most of his money is now in ETFs and the rest in 25 individual stocks.

Diversification also means that each stock has approximately the same weight in your investment portfolio, says Dirk Gerritsen, lecturer in financial markets and investment theory at Utrecht University. “That is also the case with indexes such as the AEX. Keep it to a maximum of 10 percent per share.”

To keep the ratio intact, you need to regularly rebalance your portfolio, he warns. “Otherwise, chip machine manufacturer ASML may soon represent the largest part of the value – with all the associated risk if the price falls.”

That is one of the things that went wrong in Willemse’s blonde portfolio last year. “A few very large positions had emerged over time. That has caused a lot of damage.”

For example, its ASML shares made up one third of the portfolio value. The price of this fell considerably last year, from around 700 euros per share in January to around 500 on New Year’s Eve. “My ten-year anniversary with blondjesbeleggenbeter.nl ended with the biggest downer ever,” Willemse wrote about it on her blog.

2 Watch for these four red flags

Sophia of the Mars

You have to deal differently with individual shares than with ETFs. Janneke Willemse: “You can’t lose sight of them. I have already put so many hours of study into it.” Why? “Always keep in mind that you don’t know everything about a company. There are constant developments that you cannot foresee. Think of the accounting scandal at Ahold at the beginning of this century, which caused the share to fall in value by more than 60 percent. No one saw that coming – not even stock market analysts, who had been following the company for a long time.” Acting quickly in the event of a sharp fall in prices can still save a lot of money.

In addition, there are regular major political and macroeconomic events that influence the stock market performance of companies. Like recently the corona pandemic and the war in Ukraine.

The point is: no one can predict the future. That is why Dirk Gerritsen and Janneke Willemse do not believe in timing: as a private investor, outsmarting the stock market by, for example, selling a share at specific times and thus limiting losses. Gerritsen: “Scientific research shows that your return will then be lower than that of ETFs and investment funds whose composition does not change. Partly because investors often buy that share again too late and miss out on so much profit.” Moreover, you have to pay for every transaction on the stock exchange and that also eats away at your return.

Willemse collects information about companies and the economy from analyst reports, newspapers and other media on a daily basis. “Based on that, I constantly consider whether I should take action.” She takes action during major events, “but in practice I act as little as possible.”

That approach seems to work. Despite the big loss she suffered on her blonde portfolio last year, the 20,000 euros she invested in 2013 has more than tripled.

Student Tom Steenstra does regularly sell shares. “Never for one reason,” but because of a combination of factors. The last time was with container storage company Vopak. “When I bought shares last year, the company already had high debts, but with the interest rate rise this year, it no longer felt good. I thought it was going in the wrong direction with the ratio of net debt to gross profit. So I sold my shares.”

In addition to excessive debts when interest rates rise, there are more ‘red flags’ where it is wise to consider selling, says Hans Oudshoorn of Saxo Bank. Like a CEO leaving. “Or one with additional functions that no longer pays enough attention to the company – such as Elon Musk from Tesla who bought Twitter.”

A third red flag, in Oudshoorn’s eyes, is management with unrealistic goals. “One that predicts 30 percent growth, for example, while analysts for companies from the same sector only expect 6 or 7 percent.”

And finally, he is also alert if a company has a lot of money in cash and does little with it, except handing out gifts to shareholders – such as paying out a lot of dividends. “Then there can be strategic poverty.” This can jeopardize income, for example if a competitor comes up with an innovative product.

3 Follow a fixed sales strategy

Sophia of the Mars

A common phenomenon among investors is that they still hold on to a share on which they suffer a lot of loss. The reason, according to the well-known scientists Amos Tversky and Daniel Kahneman: loose aversion, an aversion to loss. This emotion would be so strong that people would do anything to avoid it. And then you don’t take your loss on the stock market, for example.

Recognizable? There is a trick: when you buy a share, immediately agree with yourself what percentage of loss you find acceptable. How many percent that is can depend on the type of company: is the income growing quickly or is it an established name with a stable cash flow? In short, how risky is the business?

“With such a fixed sales rule you force yourself to think before the price drops and you don’t let your loss mount indefinitely,” explains Oudshoorn. Also consider your goal: are you investing for your retirement in ten years or for fun?

If you have devised a sell rule, you can set the broker where you invest to automatically sell a share when it reaches a certain price, with a so-called stop-loss order. This is possible, for example, at De Giro.

Suppose you buy a share at a price of 10 euros and want to sell it when it falls to 8 euros. Then you place a stop loss order on that last price. Oudshoorn: “Be aware that a stop-loss order is no guarantee that you will end up with exactly those 8 euros. If the price falls sharply, it can go lower [voordat het aandeel daadwerkelijk verkocht wordt] – and your loss is therefore greater.”

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