Spread betting guide | Robbie Burns
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Robbie Burns, also known as the Naked Trader, is back with The Naked Traders Guide To Spread Betting.
Many investors are instantly concerned by the word ‘betting’, however Robbie demonstrates how the associated risks can be managed and even introduces us to a new investing idea which he calls the ‘Spread ISA’.
Using similar strategies you may already be accustomed to, we uncover Robbie’s thoughts on how we can use spread betting to grow substantial sums of money.
Let’s take a look.
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Robbie gained popularity whilst writing a column for the Sunday Times called ‘My DIY Pension’.
He disclosed his investment decisions from 2002 and eventually managed to turn a £40,000 account into £500,000 by 2018.
One of a small community of ISA Millionaires, Robbie continues to share his investment decisions on his Naked Trader website under ‘Robbie’s Trading Diary’.
From 2006 through to today, Robbie has provided more than 1500 trades.
Before looking at his spread betting techniques we quickly analyse the stats from all his recommendations.
From Robbie’s closed trades, his equity curve looks like this.
There would likely have been slightly more volatility than the curve suggests, but nonetheless we can see over the 14-year period how his account grew.
Robbie’s average trade is held for 198 days.
He has a winning strike rate of 78%.
His average win value is £1473 and his average loss is £355, providing a risk reward ratio of just over 4.
The average stop loss position is 11%.
Overall, very healthy stats. Now let us move on to the spread betting principles which have contributed to such returns.
Robbie is aware of the stigma when talking about spread betting at social events, acknowledging that people instantly relate the topic to gambling, and do not take him seriously.
He’s since claimed to be a window cleaner and even an owner of a cat boarding home, or anything that does not relate to the word ‘betting’.
Once fully understood and applied correctly however, spread betting does not need to be associated with gambling in the way that most people perceive.
Robbie says;
“It’s a tool with so many advantages that I think it’s crazy that people either ignore it, or even worse think it’s too complicated, its actually extremely simple”.
Before we move on, it must be noted that buying and selling shares through a spread betting company does not mean you own any shares of the business, but in the same way as owning shares, you still receive dividend payments.
You are in effect betting on whether the share price is going up or going down, which is not entirely different than buying shares the conventional way.
The term spread is determined by the price at which you can buy a stock, also known as the offer, and the price at which you can sell a stock, also known as the bid.
The difference between the buy and sell price is called the spread and is the margin of profit that the spread betting company will make on each trade.
Clearly, the more often you trade the more profit the spread betting company earns.
We will see specific strategies Robbie has used shortly, but first let us quickly look at some pros and cons of spread betting.
By far the biggest attraction is the tax benefits. Spread betting is considered gambling and is therefore tax-free, meaning any profits you make are completely exempt from paying tax. Purchases are also free from stamp duty.
Remember however Robbie is UK based, therefore spread betting regulations and the associated tax advantages can vary considerably in other countries.
Another benefit is the ability to use leverage, often called margin. In effect this means that you could control perhaps £10,000 by depositing just £1000 into your account.
Although, in the wrong hands, such credit availability can be a negative, causing the investor to risk too much whilst amplifying losses exceeding their account balances. Such a scenario could result in what is called a ‘margin’ call.
Another advantage is being able to go short a stock, by betting that the price of a stock will go down. An option which is not available in a standard brokerage account.
Arguably the largest downside to spread betting is its addictive nature. The platforms generally promote excitement in the hope of more participation and therefore more spread costs. The combination of excitement and leverage is incredibly dangerous.
The final downside to consider is the cost of holding positions for longer than 3 months. At the end of every 3-month holding period there is a ‘rollover’, this typically means paying some more spread costs to hold for longer.
To summarise, Robbie says;
“If you get to grips with the downsides and understand them, and max out the upsides, it is brilliant”
Both myself and Robbie use the platform IG index, I personally use their CFD platform for my longer-term trades and their spread betting platform for selling stocks short.
Here is a typical trade execution screen.
The main difference between a standard stock purchase and a spread betting purchase is that you trade per point. For example, if you were to enter a spread betting trade at £10 per point, your position size would be just over £2750. The buy price multiplied by £10.
Hit ‘place deal’ and you are done.
With the basics covered, lets look at the methods Robbie uses.
Robbie says; -
“Personally, I trade pretty much everything from FTSE shares to small caps”.
Robbie also suggests that he uses the online platform Stockopedia for his trading ideas, the site offers scans for many guru strategies including Robbie’s.
I am a prolific user of Stockopedia too, and for those interested I have managed to negotiate a free trial and discount through the link below.
Like many of the professional traders we have covered, Robbie places risk management as a priority, and begins by providing some rules prior to making a trading decision.
Always have a stop is rule number one.
Using the example of a company called Stanley Gibbons Robbie demonstrates the importance of a stop loss. Referring to a popular Twitter tipster who often boasted about not using stops.
The tipster announced he bought in at £3.
Over the coming months not only did the tipster not sell, he bought more trying to average down his purchase price.
The stock eventually dropped to around 10 pence, effectively losing his entire position.
Stop averaging down on a losing position is therefore rule number two.
Central to his risk management and spread betting method, Robbie uses a dual stop loss approach.
First Robbie determines a worst-case scenario stop. Depending on the structure of the chart this could be a wide 10% maximum stop loss, he calls this his insurance should anything go drastically wrong. This is placed immediately with the spread betting company.
The second stop is a visual judgment, reacting quickly should the price move against the position. In this scenario Robbie would be out quickly taking a small loss. He calls this the ‘Get Out Quick’ stop.
Let us look at some chart examples Robbie uses with this method.
The first example is a company called Fenner. Robbie seen the company recovering strongly accompanied by a spike in profits and a solid debt reduction plan.
Using the Stockopedia report for that period, Robbie would have seen the Net profit increase to a positive 34 million, a huge increase from the year prior.
The Stock rank also suggested a very high score of 96.
With the fundamentals established, Robbie referred back to the chart.
He bought in for £20 per point at 375, equating to an overall position size of £7500. He considered a possible ‘get out quick’ price of around 355.
And immediately entered a worst-case scenario stop at 335 with the spread betting company.
A month later he sold at 503 for a profit of over £2500, equalling a 33% return.
Next, we have the funeral company Dignity.
After reviewing the fundamentals Robbie determined that the stock had plenty of growth potential. He looked at the chart and found the price had recently broken out to the upside.
He bought in at £7.80 for a spread bet of £10 per point, immediately put a worst-case scenario stop loss at £6.70, and estimated the get out quick price to be around £7.20.
The price eventually rose to beyond £28, during which Robbie kept moving his stop loss up until he was stopped out at £25.52 per share, for a profit of £17,740, equivalent to a 227% gain.
Spread betting provides the benefit of shorting a stock, or betting that the price will go down. Robbie regularly used this technique on stocks showing weakness and in particular big debt, and says;-
“Shorting is one of the main benefits of spread betting, therefore you ought to seriously consider shorting as part of your trading armoury”.
An example of a short trade is provided in the book using the company AA.
Again, referring to the fundamentals Robbie would look for excessive debt in the accounts, and here he could see net debt of over 2.8 billion which had grown considerably over the years. The Altman score also showed the company as a bankruptcy risk.
Having established the less than desirable fundamentals, Robbie would wait for the opportune moment to place a short spread bet. He found that moment in September 2016, placing a short trade of £20 per point at a price of just over £3. This gave a position size of £6000.
He used one hard stop at a price of 318. The price dropped over the following few weeks and Robbie closed for a profit of over £1000. He recognised the price drifted down much further over the next few months, but this is just an inevitable part of trading.
This brings us to the final part of the review, and perhaps the most important. We are introduced to what Robbie calls the Spread ISA. ISA stands for Individual Savings Account and basically means you can put £20,000 per year into the account and any profits are shielded from the tax man.
The benefit of spread betting is that there is no limit on your investment, and all profits are tax free. So long as you do not use leverage in your spread betting account you are basically investing with the same principles as you would a standard brokerage account, but with unlimited tax advantages.
A standard brokerage account does not have any tax advantage.
Robbie suggests utilising all your ISA allocation each year, and anything over the ISA allocation use a spread betting account without leverage. This is what he calls a spread ISA.
Robbie summarises his thoughts on spread betting when he says:-
“it’s a mixture, I think, of common sense, the chart, fundamentals and legal tax avoidance”
For anyone in the UK looking to take advantage of basic stock trading principles, in combination with great tax benefits, the book is a fantastic enjoyable read.
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Financial Wisdom