How anyone can make money trading shares on the stock market
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In this animated video we present The Naked Trader by Robbie Burns.
Robbie is a writer, journalist and investor come trader. He is believed to have turned £50,000 into approximately 1 million in 12 years. This gives an average annual return of almost 28%!
The subtitle says ‘How anyone can make money trading shares’ and that is exactly how the book is presented.
Robbie Burns arguably brings investing (or as the title suggests, trading) back to basics with his ‘armchair’ investing approach.
In his previous career as a journalist between 2002 and 2005, Robbie wrote a column called ‘My DIY Pension’ and it reported gains of over 100% turning £40,000 into £80,000 during this time. A few years later he is said to have turned this into £250,000 and thereafter increased his profits to a tax-free gain of over £1,000,000.
So, what style does Robbie approach the stock market with?
In his own words he says;
"I strongly believe charts are very important to look at, but I also believe it’s simply crazy to buy and sell shares on the basis of looking at a chart and nothing else at all".
We can take it from that statement that Robbie takes a hybrid type approach, not a pure ‘trading’ or ‘investing’ style but rather a combination of both. He does however say that he holds shares from anywhere between 3 months and 2 years, it is therefore a personal judgement of where you think Robbie’s style falls.
Additionally, trying to replicate Robbie’s strategy is difficult due to the subjectivity that is used throughout the book, for example, the interpretation of financial statements is used to look for positive or negative lines of text. Likewise, interpreting whether a company will have continued growing demand for its product is difficult to determine.
Nonetheless, despite not being systematic, the approach Robbie takes certainly seems enjoyable and we hope to unfold some of his thoughts in this video.
We will skip the beginning chapter which gives an hour by hour approach to a typical Robbie Burns day but let’s just say it involves a lot of toast being consumed….
Robbie makes a pertinent point when he says;
“Make more money by not relying on the markets”
His message suggests that if the stock market is your main source of income it is harder to make money.
Without the necessity to make money your investing decisions can be made in a more patient manner. Try to seek out other income streams before committing everything to your investing returns.
A common question from beginners is “how much do I need to become a fulltime trader”, Robbie suggests that £500 is not enough to even dip your toe in the water, suggesting that a £50,000 pretend paper account will set you in good stead before putting real money into the markets.
To provide some calculation to the original question we must first understand what a realistic return per year looks like. Robbie suggests 20 to 25% per year is achievable, therefore if you have £100,000 as a trading account you could return between 20 and 25 thousand pound per year.
Using a smaller account to achieve such returns is just too risky, in other words the use of leverage is a no no.
Remember, using £20,000 to control a £100,000 trading account might amplify your profits by five times as much, but it also means you might amplify your losses by the same amount.
Robbie’s view is to never use credit or leverage, use only the cash balance that you have made available for your investing endeavours.
There is simply no need to force the returns using leverage, a £20,000 account would turn into one million over 20 years by compounding an average 22% return per year. Patience is key.
After making these kinds of returns, you want to keep them, as such Robbie suggests using an ISA, which is short for an Individual Savings Account.
At the time of his writing you could save £15,000 per year into an ISA and any profits you make from this account are not liable for any capital gains tax.
Let’s have a look at a quick example on how using an ISA can make incredible savings.
Imagine if after 5 years you invested the maximum £15,000 into an ISA each year, which in total is £75,000, but during this time you make very conservative returns and increase the account to £100,000.
Assuming in the 6th year you make up for the previous 5 years of conservative returns and return a profit of £50,000 for the year, none of this profit is taxable!
If your tax rate is 28% you would have normally had to pay £14,000 in tax outside of an ISA, therefore leaving a lesser amount of £36,000 in profit.
Robbie himself has accrued over a million pound in his ISA, if he has a 25% annual profit of £250,000 he pays zero tax, whereas £250,000 pounds outside of an ISA could cost £70,000! at a tax rate of 28%
An ISA is certainly worth considering if you want to keep the taxman at bay.
Not for the first time in our book reviews we come across the topic of managing losses, Robbie says this is the most important lesson and by taking lots of losses you will make a lot of money.
In other words, if you can keep your many losses small and hold onto your few winners whilst they grow, your account will increase overall.
Robbie provides the following glimpse of a trading account.
At first glance it may seem like this is a poor trading account, after all 7 out of the 10 trades were losing trades.
However, on closer inspection we can see that the 3 winners were much larger than the 7 losers combined, and by using £5000 per position the returns would look like this.
Providing an overall profit of £2500.
Robbie does not touch on this himself, but by looking at these numbers we can see that the average loss per trade is £335 and the average winning trade was £1600, this is close to a 5 to 1 win loss ratio, and if these stats continued, in the long run it has the makings of a very profitable system.
Robbie talks about a trader who could simply not accept a loss, he bought shares in Northern Rock, watched the price and held on continuously in the hope it would recover. The rest as they say is history. But let’s look at the chart.
We can see in mid-2007 the stock began its decline. At this point it is likely that those that bought into Northern rock in the prior 6 months were showing a small loss.
Hindsight is easy, but had you stuck to a loss cutting plan and sold your shares, you would have lived to trade another day.
Perhaps a structured stop loss instead of a percentage loss would have helped. For example, here we have a channel with inflection points giving guidance on potential support.
If it breaks down, sell.
There are so many triggers for selling, just be sure to have one to avoid charts like this.
When it comes to stock selection Robbie says that he approaches his research as if he is a billionaire, and as if he had all the money to buy the company outright.
The first rule Robbie uses is the fifteen times rule, the price of the company must be less than fifteen times the profits it generates.
Therefore, a company that generates £100,000 in profits should not be valued at more than £1,500,000.
Other aspects that he uses include;
Debt should be under three-times its annual profits.
Demand for its products are likely to grow.
The company’s annual report has a positive bias.
And the price chart is in an upward trend.
These are the main filters Robbie uses in stock selection, now let us look at how he combines them further into some winning strategies...
Everyone is looking for exciting quick gains, but boring companies do just fine say’s Robbie.
Look at this example used in the book, a company called Scapa that makes sticky tape, hardly a gold mining company with the promise of riches you may think, but look at the chart here.
Scapa grew from 15 pence to 5 pound over a 7 year period, that’s a multiple of 33 times, meaning a £5000 investment would have turned into £165,000! Not bad for a boring company…
Buy what you know says Robbie. Robbie was an independent distributor for a company called Telecom Plus which provides energy and telephony, he therefore had an idea of how the business model worked and the margins it was able to manage.
At the time of writing Robbie said he had earned around £700,000 in profits from investing in the company, again let’s look at the chart from the book.
From 2008 to 2014 the stock rose from around £2 to £20 in the 6 year period, a 1000% return.
Think about the sector you are in or an area of expertise you may have.
Another strategy Robbie uses is to look at shares that are likely to transition from the alternative investment market into the main market.
Once a company reaches a certain value and shows a desire for future growth the natural progression would be to apply to join the FTSE 250.
Many big investment funds do not invest in the alternative investment markets, but when a stock becomes eligible to the main market, funds can pour into it which in turn can increase its share price.
Robbie used a company called Quindell to demonstrate this theory.
Here the company announced its desire to move into the main market, the share price then gradually grew from around 10 to 40 in the space of 6 months.
If you are like me and see patterns everywhere…. You will also see how a resistance line formed from three prominent inflection points before breaking out and making a near 200% return in two months. Perhaps for another video but combining this transition theory with technical analysis could be a good strategy.
On occasions a company may offer shares in the way of an Initial Public Offering, this is another strategy Robbie is keen on.
Robbie took a liking to the big data company called Wandisco seen here.
He bought in at around £2 and watched the price increase to £10 before selling, earning a 500% return in 12 months.
IPO’s can be found through newspapers, investment magazines and many financial websites, but Robbie says be sure to complete your research by looking at financial statements and assessing product demand, IPO’s can be risky if you enter them blindly.
Let’s move on to the later chapters of the book and see what Robbie suggests we don’t do.
Robbie says his worst trade ever was Coffee Republic, he made all the beginner mistakes you can think of, he drank in the coffee shop near to where he lived and used this as the basis for his investment decision.
He got emotional involved
He ignored many warning signs
He averaged down assuming the stock would recover at some stage.
But worst of all he never had a stop loss.
The stock drifted down from around £2.20 to zero over a 6-month period, Robbie eventually sold out for a £7,000 loss.
A lesson in what not to do…
In this review we end on a key point raised by Robbie.
You must remain disciplined and be mindful that you are an informed investor, not a gambler taking punts on stocks that you have not thoroughly researched or put the necessary risk management plans in place.
Remain disciplined, be patient and you can make life changing returns.
To recap.
Don’t rely solely on trading as your main source of income.
Be realistic about the amount of trading capital you need and don’t try to leverage what you do have.
Use an Individual Savings Account to protect your profits from tax.
Keep losses small and let your winners run.
Understand the company, complete research on financial statements and determine product demand.
Look for a catalyst like an IPO, a transition into the FTSE 250 or a sector you may have expertise in.
And lastly, remain disciplined.
In closing, the book is excellent for beginning investors and covers almost every aspect that is required in an easy to understand flow. As such we give the book 5 stars.
The book also covers a section on spread betting, if you would like a separate review on this soon please let me know in the comments below.