Diary of a Dumb Investor: buying shares – and shedding cash

As I said last week, I was sure that I wanted to invest in a Japan-focused fund, GLG CoreAlpha, as the earthquake, tsunami and nuclear emergency pushed the price of its units down to bargain basement levels.

But in the end I decided against it – in part because of reader criticism that buying funds was ‘dull’ and ‘not particularly safe'; in part because I couldn’t be sure of exactly what price I would end up paying.

(I remembered having to wait a couple of days to learn the price I paid for the only fund I’ve bought so far, Aberdeen Emerging Markets. What if Japanese stocks had suddenly bounced back by the time my trade went through?)

I was also a little fed up of watching my current holdings go absolutely nowhere. I really, really am taking a long-term view on these investments, but still – it’s alarming to see all that red!

So on Tuesday, after noticing that the markets were being subjected to an unusually savage beating, I decided to take reader advice and invest in Lloyds, the troubled British bank. Everyone stressed the importance of research when buying shares, and in the hour or two before I clicked on the ‘place a deal now’ button, I did read up on the stock.
Dividends and bailouts

As well as being the high street bank we all know, Lloyds is a FTSE 100 company, bailed out by the government in the financial crisis, that sort of returned to profit last year. It faces dark clouds ahead in the shape of economic turmoil in Ireland and new European legislation. Its 2010 earnings report – whose 149 pages I attempted to get through – disappointed market analysts, and it hasn’t paid a dividend in some time.

Everyone stressed the importance of looking at the price-to-earnings ratio; unfortunately, none exists for the bank, as its earnings last year don’t really count, I believe.

I know Lloyds sounds like a bit of a dog from all this, but at 59.9p, down from a high of over £3 in 2007, it looked cheap to me. And a number of readers, not to mention my rival, Young Faust, all believe in the bank, which would fit quite nicely into the ‘UK equities’ slot in my planned portfolio.

One reader, Snoekie, thinks Lloyds will reinstate dividends as soon as the business is consolidated, and NormaDear says, ‘it may take a while, but I would be surprised if it did not retrace back up to the high 60p's.’ Furthermore, I remembered a Citywire piece I read a while ago, in which Rob Kyprianou said recovering bank shares were a good place to invest.

Finally, I understand what Lloyds does. A couple of the financial products I’ve looked at are pretty opaque to me (ETF? more like WTF); yet it is pretty clear what this bank and all other lenders do: make money.

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