Frequently Asked Questions
Q – Is STAR ‘paper’ based, rather than being a computer software programme?
A – The monthly bulletin is sent out early each month as an email attachment in pdf format. It is not made available to subscribers as a computer programme.
Q – Is the monthly update an email with documents attached?
A – Each STAR bulletin is emailed at the beginning of each month to subscribers as an email attachment. Each bulletin covers all the 300 shares and contains a sale list as well as the current purchase lists.
Q – As the update is every month, do you give tips as to when to sell the shares before the next update?
A – The sale list is updated each month at the same time as the purchase lists and applies at the prices ruling at the publication date.
Q – How many shares per company do you suggest are purchased and in how many companies?
A – There are purchase lists for 10 and 20 shares each month. The basic procedure assumes you divide the total amount to be invested equally between the 10 or 20 shares.
Q – What is the Speculative List?
A – The speculative list is just that – a list of shares whose growth rate is expected to increase faster than previously thought. These selections are intended to flag shares that may move up quite quickly but nothing is guaranteed and the selections are not likely to be suitable for longer term serious investing.
Q – On the income portfolio, is it assumed that dividends are reinvested immediately, taken out as cash or accumulated until they are of sufficient size to add another company to the portfolio?
A – As far as the STAR past performance records are concerned all dividend payments have been excluded from the annual results, as have dealing costs. Turning to the live management of STAR income portfolios some investors will no doubt wish to use dividend payments to supplement their income, while others may choose to build up income until the total is large enough to make an additional share purchase. What to do with dividend income must be a personal decision for each investor. There will obviously be advantages in re-investing dividends in tax advantageous wrappers like SIPPs and ISAs once the total has built up to an amount that is, say, equal to the average unit holding already in the portfolio. Once this happens the most logical procedure would be to add another holding from the latest monthly Top Twenty table. Thus, if there was already a portfolio with ten shares with an average unit value of £5,000 one more holding would be added, from the latest top twenty purchase list, once the cash balance had reached £5,000. There would then be 11 holdings each with a value of approximately £5,000.
Q – The Market has recently fallen a lot. Should I sell now or wait?
A – We are not allowed to give individual investment advice. However, we are able to repeat that the STAR growth and income selection methods are intended to be aids to long term investment and short-term movements, however dramatic, shouldn’t alter one’s long-term objectives. Given a basic investment strategy it is probably sensible to defer creating a new portfolio, or making major changes to an existing one, when equity markets are volatile and unstable. When implementing an investment plan it is always important to distinguish between share trading and longer-term investment.
Q – I see that share prices have changed a lot since the last bulletin was produced. Should I wait for the next one before buying or selling shares?
A – The ranking lists and purchase and sale tables relate to the prices given at the date they are produced. If share prices have changed significantly since the publication date (eg by more than 5%) it is probably better to defer action until the next bulletin and then act as soon as possible after receiving it.
Q – Some of the shares on the Speculative List have very high Price Earnings Ratios, is this a good or bad thing given a high growth rate?
A – A high historic price earnings ratio means that a particular share is expensive in terms of its most recent reported earnings (that is the amount of profit available to shareholders after deduction of all costs including taxation). If the particular company is growing its profits very fast, say at 50% or more each year, then a high historic multiple may be acceptable. However, such ratings can be dangerous as the share prices of companies that fail to meet high expectations can fall in price very fast.
Q – Do you have to pay income tax on the profits?
A – Taxation on profits depends entirely on each person’s taxation position vis-a-vis capital gains tax (CGT) allowances and whether or not the investments are within a wrapper such as an ISA or SIPP.
Q – Is there a key to explain the rating values in the gearing column?
A – This is explained in the Glossary of Terms
Q – One of the shares in my existing portfolio does not appear in your full ranking list, even though it has a market cap. of over £700m. Has this company been filtered out for some reason other than size?
A – From time-to-time companies may slip out of the basic list either because a major share price fall has substantially reduced their market value or because they are facing several years of projected losses. When such companies start to recover they are added back to the underlying tables.
Q – I note that in your notes a list of growth shares has an end column for technical indicator. Do you recommend some technical analysis to time acquisitions, such as avoiding a falling weekly MACD, or have you now dropped any technical consideration?
A – For some years we used a very basic technical indicator based on moving averages and excluded from current purchase those that were falling below both short- and long-term moving averages. However, I found that as STAR is intended to be a long-term value-based approach the use of the technical indicator actually removed some good recovery stocks and didn’t add to the longer-term performance
Q – Having looked at your website, it appears that your calculations do not include dealing and related charges, as you reinvest the sale proceeds penny for penny into new purchases. Please explain, as at first sight if these charges are not included, your growth claims seem to be unachievable in real terms
A – Yes, you are quite correct that no charges are included as the exercise has been to compare the selection process per se with the FTSE ASI. However, with the STAR data it must be remembered that no account has been taken of any dividend income and in a detailed analysis undertaken by Sharelink several years ago the inclusion of both streams on larger and mid cap stocks would have resulted in somewhat higher returns for STAR selections overall. I would agree that with many smaller cap stocks where there is a much wider price spread the total dealing costs would have a much bigger impact.
Q – Do you make buy/sell recommendations based on the price obtainable lying within certain bands? (ie what movement in the price is needed to abort the recommendation?)
A – I have never been asked to provide price bands but as a general guide the sale signals will normally hold within a price range of at least 10% whereas the purchase ones are more likely to lie in a 5% band.
Q – Do you recommend certain stop loss or limit levels?
A – As the STAR approach is designed to be one of long-term investing with the signals provided by the fundamental purchase and sale lists I have not used stop loss or gain lock indicators. However there is no reason why an individual investor should not use them.
Q – What is the basis for your ‘Rankings’ and how should this be used?
A – The ranking list represents the position of the relevant company in terms of future growth in earnings vis-a-vis its peers with the fastest growing companies at the top of the list.
Q – My first thought was that I would be managing my portfolio by switching whenever a share goes out of the list and a new one comes in. My second thought was that switching could typically cost 2.5% a time and one would be missing out on some dividends. Have you done any research to compare such aggressive management with your method, which I understand to be to go for an annual review with more frequent “weeding”‘ only when a share goes on to the “sell” list? Maybe one would use one’s judgment to operate somewhere in between.
A – I have actually been trying to reduce the number of switches that are signalled by STAR. This is partly because of the transaction costs and partly because the switch signals are not always profitable even though in aggregate the “switched” portfolios appear to have out-performed the “static” ones. Personally I tend to follow the path of minimum switching and only sell when a share first appears on the monthly sale list.
Q – Tantalisingly you say that your second-stage screening analysis eliminates a large number of shares from the initial ranking and indeed I see that in the October Buy10 only one share came from the top 10 rank. Can you tell me what at least the main factors are which you take into account at the crucial screening stage? I am intrigued to know more whilst appreciating that this is your proprietary area in which you must have carried out a great deal of research over the years. To what extent is this process subjective?
A – The process is not at all subjective. The fact is that shares with the highest projected growth rates that are selected from the cheapest quartile in any group of well researched shares do appear to do better than average over the medium to longer term. The chief problem with generating the STAR lists is that I have found, over the years, that none of the available data sources are totally reliable and we manually cross-check all data for each company on the day we produce the STAR bulletin.