Transcript: The Dos And Don'ts Of Spread Betting

Published in Investing on 9 May 2011

David Kuo talks to Robbie Burns.

You can listen to or download this podcast here.

 

David:

This is Money Talk, the weekly investing podcast from the Motley Fool. I am David Kuo, and today I am joined by a man who I never tire of talking to, because he is down-to-earth, down with the boys, and he's a downright decent chap, because he set up the Buffy the Vampire Slayer phone line in 1997 with Sky. He is with me now, and I'm glad to say he is fully clothed, because we do have women in the office. If you haven't already guessed, he is Robbie Burns, and he is going to give us the lowdown on spread betting.

Robbie:

"Down with the boys"? Gosh, I hope my wife doesn't listen to this! She'll say, that was a secret you've been keeping from me for all these years!

David:

So anyway, welcome back to Money Talk, Robbie.

Robbie:

It feels like it was yesterday, I was here.

David:

I think it was only yesterday that you were here, yes. That podcast that we did the last time is still very, very popular today.

Robbie:

Oh, is it? – oh great, that's good news, yeah.

David:

I know. So anyway, let's start from the very, very top and get you to explain what spread betting is all about.

Robbie:

Spread betting ... well, it's something I've used since 1998/1999. I suppose in effect, instead of buying shares in the market, you're in effect having a bet with a bookie instead. So it's bit like, instead of buying a thousand pounds' worth of Vodafone, you're nipping down to your local William Hill and you're saying to your bookmaker, I want to buy a thousand quids' worth of Vodafone. They say fine – it's 62p to buy; we're going to charge you 63p instead of 62. 

But the great thing is, you're not going to have to pay tax on any winnings, like you might have to, and you can also bet on it to go down if you want, we don't care. If you want to bet on Vodafone share price to go down, bet on it to go down, bet on it to go up. It doesn't cost you any commission or any money, apart from that little extra spread you pay, so it's a very powerful tool.

David:

You make it sound very simple, and what you're saying is that you are betting that a price will either be higher or lower than the current price. If you get it right, you win; if you get it wrong, you lose.

Robbie:

Exactly. It's a bit like that, Bruce Forsyth – was it Play Your Cards Right?

David:

Play Your Cards Right, yes.

Robbie:

Are you going higher? – or are you going lower? That's the kind of thing, that's right.

David:

OK, now that sounds pretty simple. So what are the dangers?

Robbie:

Well, I guess an analogy might be, normal share trading is a bit like, it's quite straightforward – you're driving your Ford Mondeo (I'm not into cars – is there still a Ford Mondeo?). But now this is a Ferrari you're looking at. So with spread betting, you need to be careful about how much you press the pedal. The biggest danger with spread betting is they kind of lend you money. So if you say you've got a thousand pounds, and put it with your spread betting firm, they say to you: "Robbie, your thousands pounds – go off, you can bet on, you can have eight or ten thousand pounds' worth of shares on that thousand pounds", which is called leverage, is the jargon. 

What it actually means is, it's a bit like taking that bookmaker's credit card. So you put your thousand in, but what happens if you've only got three grand in your bank account, and suddenly you owe the bookmaker six grand? That's what you have to be careful with, using the leverage.

So I would say to people, do spread bet, but don't use up very much of the leverage. Only bet with what you can actually afford, because if you bought your Vodafone or whatever with a normal share account, you know you're only going to lose your thousand pounds, but if Vodafone goes down a lot, with a spread bet, because it's pounds per point, you can actually lose more money than you've got in your account.

David:

So what you're saying is, there are dangers involved in it?

Robbie:

Oh definitely, definite dangers.

David:

And you can actually lose more than your stake money, unlike a bookie, for instance, where if you put a £10 bet on the Grand National, all you lose is £10?

Robbie:

Exactly. But I suppose if you say, £10 a point with a spread bet, it's not £10 – you could lose £800 or £1,000, or almost unlimited with spread bet firms. That's why have to be very careful. You have to understand what you're doing, that's the main thing. Before you go into it, do a lot of reading, understand the dangers, which hopefully my new book on spread betting will lay that out for you.

David:

Now this is where I have a small bone to pick with you, Robbie, because when you wrote your first book, The Naked Trader, you extolled the virtues of buying shares for the reasonably long term. Now, you've done an about face. For a naked person to do an about face, well it's not a very pleasant sight. Why have you written a book about spread betting, and encouraging people to go in and start betting money on something where they could lose more than their shirt?

Robbie:

Ah, well, there are other layers to this, in that actually this is where, if you're very careful, you don't have to lose your shirt. The spread firms have something called "guaranteed stop loss". So say your share's a pound, and I don't want to lose more than a certain amount, so I don't want to lose my whole thousand pounds, you say to the bookie, if Vodafone shares go down to 80p, it's sold – I'm out of there, it's gone.

Actually, a better example would be last week – there's a share called Desire Petroleum, which nearly every single private punter in the whole world seem to be on. Why? – because of course it goes down a lot. It went down from 35p to 15p overnight, which is quite a percentage drop, if you do the maths. 

Now, if you had this bet with a spread bet firm, and you'd said, you had a guaranteed stop loss of 30, even though the shares went from 35 to 15p, you'd have been out at 30p, even though the shares weren't at 30p ever, so you'd only have lost your 20% or whatever. You wouldn't have lost the whole stake. So in fact, if you're really really clever, and you understand stop losses, in fact your losses aren't unlimited with a spread bet firm, as long as you use that, a stop loss. 

But this would be a guaranteed stop loss – there is a little bit of a charge for that, so when you put your guaranteed stop loss on, they charge you a little bit more on the spread, so you pay a little bit more for your bet when you put it on. But you're guaranteed out, which I think is quite nice, especially for new spread betters.

David:

So what you're saying is that stop losses are a bit like a seatbelt, in a car? You put the seatbelt on, and if the car were to jerk forward, you're not going to bang your head against the windscreen?

Robbie:

With a guaranteed stop loss, yes. It's guaranteed, they'll guarantee to take you out at that specified price.

David:

So how tightly should you be tying the seatbelt to make sure that, you first of all don't bump your head, but at the same time your journey isn't entirely uncomfortable?

Robbie:

Do you know what, that's a really good question. I'm very impressed – that is a very good question. You're absolutely quite right, because if you set your seatbelt too loose or too tight ... because you're right – say you had your bet on Desire Petroleum, and you bought Desire Petroleum at 35p and put your stop loss on at only 32p, well you know shares go up and down quite a lot. 

You'd probably get stopped out, so you'd lose, but the share could go back up again, which wouldn't be so good. At eight o'clock in the morning with the stock market, the spreads between the buy and sell price can be very wide, and that's when a lot of people get taken out on their stocks.

So there's a kind of arc to where to place your stop loss. It should be far enough away so you don't get hit by a little bit of volatility in the share, but not too far away, because it's pointless having the stop loss in the first place. So what I suggest to people is, it should be at the very least 10% away from the price you're in. 

You should take a look and see how volatile is the stock you're in – is it a really volatile FTSE 100 stock? Just have a look at the chart – where does it tend to stop falling, and set it a little bit below that, so you're not stopped out, otherwise you'll get stopped out all the time; you'll gradually lose all your money. So there's a great arc to it, and that's something, you're quite right, you should look at your stop loss every time.

The beauty of stop losses is that you can move them. So the other thing is, you can lock in a profit. So say you bought Desire at 35, you set your original stop loss at 30; now Desire goes to 50p. You think, right – I'm going to move my stop loss up. You push your stop loss up to 40. You're now guaranteed a profit, because if it falls down to 40, you'll be out of profit. And this is what I do with my bigger shares – I gradually move the stop loss as the share price goes up.

You were talking about, interestingly enough, short-term – I think spread betting is for the shorter term. Well actually, on some spread bets, I've been in them for nearly a year and a half to two years. For example, Aggreko, which I think we talked about last time?

David:

We did – that's done exceedingly well.

Robbie:

I think I bought it on a spread bet at about £7. It's now £16. I still have the spread bet open. I just raised – my stop loss is now at 12, I think. I just gradually raised the stop loss up. I've got no problem with holding that spread bet open for a long time. One recent one, one very nice one for me, was Nestor Healthcare, which got bid for. I bought it for 30p on a spread bet; it got bid for at 1.10, and I held it all the way through, and just raised the stop loss gently up underneath the price. So I look on spread betting as potential for longer term trading as well as shorter term. The only downside of that is, there's a little bit of cost involved in holding a spread bet open. It's not very much – for Nestor Healthcare, it's something like 40p a day for every weekday, so over a year, even that didn't mount up to that much.

David:

So you've given then an example of two shares: Aggreko and Nestor Healthcare are shares that you've gone long on. Are there are any shares that you've gone short on?

Robbie:

Yes. Now I did treat short – short, I suppose we should say, is jargon for betting on a share to go down, if you don't know what a short is. You think, hmm, this company's not very good, and I think it's going to go down. 

My favourite short over the last year, and I'll tell you exactly why I thought it was a great short was, something I thought I was going to buy, which was a new issue called Betfair, because Betfair is a betting company that, you bet on horses, you can bet against horses. It's a great company. I thought, this is a fantastic company – everybody loves Betfair, I'm going to buy it when it was going to come on the market. 

But I looked at it, and the valuation when it came on the market was 1.5 billion. I looked at how much profit it was making – 18 million, and that might go to 40 million. I thought – hang on a minute, that's a pretty low profit to what it's worth, and it was valued at £15 a share. So I shorted it with a spread bet firm and I think it was only two months later it was a tenner; I think they're nine quid now. I've come out of that short, but I made 500 times my stake, which was very nice. So that was a lovely example of a short where the company was fairly obviously overvalued to me at the time, even though I really liked the company, and I use it. I think it's a great company.

David:

So did you put a stop loss in place for Betfair, then?

Robbie:

Yes, but when you're betting on a share to go down, obviously the stop loss is the other way. Your stop loss is set in case it goes higher. I don't know what it was, but when I went in to short it, to bet on it to go down from £15, my stop loss would probably have been at something like £16.50. So my maximum loss would have been 150 points.

David:

Because really, when you're betting on a share going down, your losses could be unlimited, because the share price could actually go in the opposite direction?

Robbie:

Yes. So say there was a bid for the share, and it goes up £4, you've suddenly lost 400 times your stake, but again a stop loss would take you out. But the very important thing for people to understand is, there's two different stop losses. One is a normal stop loss – that doesn't get you out overnight if the share tumbles 50p because there was a profits warning.

David:

Why is that?

Robbie:

Because they don't charge you any extra spread for the stop loss. It's a normal stop loss, and what the bookie's saying is, we'll get you out at whatever price we can in the morning. So if the share was £1 Monday night, there's a profits warning overnight, the share is now 50p, they will get you out for 50p, not at your stop loss, which might have been, say 80p. But guaranteed stop, they will, because it's called guaranteed stop loss. But when you've bought the share originally, they'd have charged you an extra point on the spread, so it doesn't cost you.

David:

So exceeding your normal stop loss is what they call a gap?

Robbie:

Exactly, yes – the share gaps down. That's what people sometimes get upset about. They go, "So and so didn't get – it's all their fault." People tend to blame the spread bet firms. I'm no apologist for them, but when I get emails, it's always, it's usually their fault. You've just got to understand what you're getting into when you take up your bet.

The other thing people don't understand is how much they're putting on, because it's not, I'm buying ten grands' worth of shares, or five grands' worth – you're buying pounds per point. But actually, it's so simple, it's unbelievable, because £10 a point is the same as a thousand shares. So if the share price is a pound, and you're putting £10 a point on, you're buying a thousand pounds' worth of shares. It's exactly the same as a thousand pounds. 

So £20 a point's 2,000 shares. If you just work out what your exposure is, because people say to me, oh yeah – I put on £5 a point and £10 a point. I say, well, what was the price of the share? – oh, I don't know about that. If it's a £10 share, you're putting on ten grand; if it was a pound share, you're putting on a grand. If you haven't got ten grand, don't ... I have people come to me and go, I've got £10 a point on the Dow, and I'll go – are you crazy? I wouldn't put £10 a point, that's about a hundred million pounds' worth of shares. You're nuts.

David:

OK. Now there are some conspiracy theorists out there, there always are, but there are some conspiracy theorists out there who say that spread betting firms deliberately stop people out of their trades. Have you seen any evidence of this?

Robbie:

I've been to two firms. I've been to IG and I went to Tradefair, which is owned by London Capital Group. Both gave me unfettered access to their trading desks, and I can tell you there was no guy in like a hat and a cigarette going, right, David Kuo's go this bet on – right, let's push the price down and get him out of that bet. Ah, he's lost money again. Let's push the price back up again, just to get him out.

David:

You're saying this doesn't happen?

Robbie:

No, I didn't see it at all. But there obviously is market manipulation everywhere you look, even though it's illegal. There's people trying to manipulate prices all the time to their own benefit. So that's why you've got to be very careful where you place your stop loss. It's not that the spread bet firms are necessarily trying to get you out.

The other reason why a spread bet firm would be foolish to try and get you out is, mostly they should want you to win, because they should simply make their money out of every trade you make, because losers are no good to them. What's the point of a loser? You'll get bored and you won't spread bet any more, so they can't make any money out of you. So actually, the people that they probably would struggle with are the odd very clever person who, I think is what's called scalp, I think it's called – they try and get the odd point here or there, and the bookie can't put that same bet off. The bookie's really losing. But if you're a big winner with a bookie, it's fine. They shouldn't close you down. IG Index won't close you down if you're winning three or four hundred thousand pounds – it's fine, no problem.

David:

Now, you mentioned that, at the beginning of the day's trading, share prices tend to be a bit more volatile. Are there any other times of the day when spread betters should be aware that prices could be very volatile?

Robbie:

Yes. 1:30 is ...

David:

Did you just make that up?

Robbie:

No. The reason I say 1:30 is when in America, this is where their big economic announcements come out.

David:

I just thought it was the time that you go for lunch.

Robbie:

I'm at lunch for the rest of the day, if I can. 1:30 ... well, for example, I'm not. Between ten o'clock and one, I'm doing other things, I'm not even at my desk. I shan't tell you what those are, David, but my wife will probably explain to you. Anyway, so 1:30, we have the United States, and then tends to drive the FTSE – sometimes it goes bananas if they're ... I'm not an economist; I don't even understand it, but something like Farm Roll produce their prices. I'm too stupid to understand it.

David:

I'm sure you do understand what they are.

Robbie:

I've no idea, and the FTSE will go down 60, because the Dow Jones is then scheduled to open up or down at 2:35. Then, if you've got FTSE 100 shares in particular, they can go completely bananas. But I very rarely use spread betting for FTSE 100 shares, because I'm not interested in the volatility. I'm interested actually ... a lot of my spread betting is being able to buy smaller companies which is are on the AIM market, and I can't buy them in my ISA tax-free. So I use spread betting as a tool to make sure everything I do is tax-free, because AIM shares aren't allowed in tax-free ISAs.

David:

So are you saying people should embrace volatility, then? Is volatility good for spread betters, or bad for spread betters?

Robbie:

It depends what kind of spread better you are. The reason most people lost with spread betting is, they simply trade too much.

David:

Can you explain that?

Robbie:

Yes, and I've talked to the spread firms as well, I think they'd bear me out. Actually, the more people trade, the more they lose, because they can't control their bets. They're going crazy, they're sitting there all day, putting on a bet – sell the FTSE, buy the FTSE. In effect, they're kind of just like gambling – it's a bit like placing money on a horse.

David:

But that is what spread betting is all about though, Robbie? That's why it's called spread betting – it is gambling.

Robbie:

Well, it depends who you are. The fact that we know that at least 80% of people lose – yes, absolutely, people go in, and actually a lot of my bookies are warning people against this. In fact, you're right – if you have a tendency to gamble, and if you're a gambler and you start losing your money on horses, I would avoid spread betting completely, because it's very addictive. It can pull you in. In fact, somebody came to a seminar of mine three or four weeks ago, he nearly lost his marriage, he nearly lost his house. He went crazy and kept buying this one share, he kept spread betting it. He bought it at £5, it went to £4. He bought more at £3, he bought more at £2; got obsessed with this share, he bought more at £1, he didn't care. He owed the spread betting firm loads of money, they were phoning him up. He wasn't answering the phone any more. He was asking his wife for money, his friends for money. It was a terrible story, and he was very very lucky in the fact that the shares started going back up, and he got a lot of his money back, but that was desperate.

What happens if you lose a lot of money? – spread betting firms then turn nasty, and they'll start phoning you and going, where's our money? – we want it now. They're not going to wait for next week. You're supposed to stump up the money right now. Don't go in over your head, and that's what a lot of people do. They haven't got the money and they go in over their head, and that's an aspect of spread betting which you have to be wary of.

David:

So what kind of shares or assets or indices are best for spread betters?

Robbie:

It really depends. The way I use spread betting is, in the main it's for buying smaller AIM companies, so I can get them tax-free. But also, when things go badly, like in 2008/2009, the FTSE was going down, I shorted the FTSE, because it gave me money coming in to my accounts. So I think, I can't remember what I had now, but say you had a £10 a point short on the FTSE, every point the FTSE goes down, you make a tenner. Again you can use a stop loss to lock your winnings in. So I don't know how much it went down, but it was a good thousand points. If you'd had £10 a point, you'd have made ten grand on it. The mistake I actually made was, I overdid it. I kept shorting the FTSE but kept taking profits too early. Again, if I'd just let the short roll on, I would actually have made a lot more money on my short.

So overall, I would say my mistakes in the past have been probably trading too much coming in and out, and the more that I do it, the more I learn to hold my position. If something like Aggreko we were talking about, it's a great share, and you've got a great spread bet on it, ignore the volatility – you can go out for weeks; I went to Florida for two weeks – didn't look at it once. 

My stop loss was well away, and I came back, it's a bit higher, and hopefully in three or four years' time it'll be £25, and I might still have that spread bet open. That's fine, I'll take the profit when it comes. But spread betting sites to me are very much designed to make you press the button, because every time you press the button, bookies should make money. It's in their interest to ensure that those spread betting sites are very addictive. The one thing I would never do would be going in and buying the FTSE here, selling the FTSE there. I don't know if the FTSE's going to go up or down, so I steer clear of it.

David:

So paint me the picture of a typical spread better's day. What would a spread better be doing first thing in the morning, when he gets onto his computer?

Robbie:

Well, I think it's tricky, because I would say that right now I'm not your average typical spread better. What about we do a spread better who's going crazy, who's getting it wrong?

David:

That sounds good – that sounds very dramatic, yes! It makes for a good podcast doing this, yes.

Robbie:

OK, so he decides he's going to become a full-time trader, which to his mind is, he's got to make at least ten or fifteen trades – "because I'm a full-time trader, I've got to make ten or fifteen trades a day." He wants to get in, so eight o'clock, he's in on his machine. "Oh, it looks good today", so he might go in and buy the FTSE and then buy the FTSE again, and then he might go in and buy ... "Oh, BT looks good." He's not thinking very clearly about what he's doing, except he wants to trade. His palms are probably sweaty, he's all emotional, he's all excited. Every time anything goes up a point or two, he's really excited one way or the other – "Am I going to make money or lose money today?" – and that's the losing spread better. But that would be quite a high proportion of people that lose. And from talk of the spread better firms, the people that lose are the people that trade too much, that over-trade, that overdo it, and people that get too greedy. 

A very interesting story when I went in was, a guy came in, put ten grand in his account, and I think it was only two months later, he had quarter of a million. I went, oh wow, great! – can't believe that he did well. Well yes, said the spread better firm, but six weeks later he owed us forty grand. I said, how can he have lost quarter of a million so quickly? They said, he got greedy. He used the leverage – now with 250 grand in his account, he had access to buying four or five million quids' worth of trades, which he did. He suddenly had five million and everything went down, and he lost all his money. So a typical spread better has got this terrible fear/greed thing going on. So if he makes money, he starts to lose it again. The whole point of it is, he's over-trading.

Me – I probably won't make a trade in the day at all. I don't think I've made a spread bet trade for a couple of weeks now, because everything's going a little, prices are going up nicely, my stop losses are in place – I'm very happy. So I wouldn't be in there all day pressing buttons.

I would say to anybody listening, if you're there feeling sweaty, getting excited, whatever (I'm talking about spread betting, not those dodgy channels you might be watching when your wife's gone to bed) ...

David:

I have no idea what you're talking about, Robbie.

Robbie:

I'm sure you haven't. That's not what you mentioned before we started the podcast, but anyway. Obviously, we'll keep that private between us, because what you get up to, David, in your private life, that has to remain, and I'd hate you to get an injunction out against me. Right, you're safe with me – I won't release the details.

David:

Where were we?

Robbie:

I'm lost as well. I can't even remember your last question.

David:

OK, so the trouble I have understanding spread betting is this, Robbie. Now, if I am a small-time spread better, and I have £5,000 in my account, and I put £5,000 in there, and I decide to trade at a pound a point. Are you saying that that person should be the same as somebody else who's got £50,000 in their account, and they should also be trading at a pound a point, rather than to be trading ten pounds a point, because he's got ten times more capital to play with the guy who's only got £5,000 in his account?

Robbie:

Oh no, I think if you've got £50,000, it's obviously sensible for your stakes to be higher than a pound a point.

David:

But isn't that the whole point behind that guy that said who started off with a small sum of money, built it up to £250,000 – isn't he right to start scaling up his bets, because he's actually got more money to play around with now?

Robbie:

Ah, no – you've got to have the money in the bank to cover, so you've got to have money separated out. The guy who lost the money, he should have taken some of the profits out and taken it out of his spread betting account. So when he got to his quarter of a million, instead of saying, right, I can now buy five million quids' worth of shares, he should have banked maybe a hundred thousand of that, taken it out, so he had a hundred and fifty left in his spread betting account, a hundred grand in the bank. 

Now he can raise his stakes a little, because he's got the money, he's taken the money out and banked it, and he can raise his stakes a little bit higher. What people do is, as the money grows in their spread betting account, they get more smug, cocky, and so they keep raising their stakes, whereas what they should do, and what I try and do is, bank some of the profits. Don't leave it in your spread betting account.

David:

Because otherwise you're going to lose it all?

Robbie:

Not necessarily, but you're tempting yourself to get greedy and you're tempting yourself to raise stakes on money that you don't really have, because in effect you're being loaned it.

David:

So give me some idea, Robbie, of the person who is best suited to spread betting? I have to confess that I've never spread bet in my life, I've always gone long on shares. Even when I saw the stock market going down, I just kept on adding, adding, adding money to my portfolio, because I knew that at some point the stock market would turn, and sure enough, it did. So therefore I was buying shares constantly, taking advantage of cheaper and cheaper prices. You, on the other hand, were somebody who took advantage of the market going down, and you thought, I can make money on the downward movement of the shares, and you did as well.

Now, both of us have probably come out about evens, because I kept on buying on the way down, and now I have a portfolio that is looking quite healthy. I didn't take any risks whatsoever; you did. So what is the best person suited to spread betting, because clearly I'm not – you are? So what is the difference between the two of us, apart from the fact that I have a full head of hair and you don't!

Robbie:

Let me see ... there seem to be a few gaps coming, I'm afraid, in there. Also it looks a bit unhygienic, initially.

David:

So between the two of us, you like spread betting – I don't.

Robbie:

Well, spread betting's part of an overall strategy to make money, but you probably don't buy any smaller companies, do you?

David:

I don't, no. I'm strictly FTSE 100.

Robbie:

You see, I'm strictly non-FTSE 100, because I like buying under-discovered shares. I think I mentioned Dialight last time, £3 – it's now £8.

David:

I know, it's done very well. I was quite astounded by that.

Robbie:

I've built up a massive spread bet in Dialight, all the way from, I think, £1.50 – that's nice tax-free money. But say ... there's quite a lot of quite big AIM shares out there now that are worth two or three hundred million, companies that you might even be interested in, but they're AIM. I'm in for capital gains tax if I start to make a decent profit on them. 

With a spread bet, I don't have to worry about capital gains tax. Once you've got a quite big portfolio and a lot of money, actually capital gains tax will be quite high. So without my spread betting, I would have paid ... I can't think about it, but it would be a fortune in tax every year, and I would be paying a fortune in tax.

For example, I'll give you one company that's an AIM share that's quite a good company, quite a big one, called Kentz. That was £1.50, which I've been buying on spread bets. It's now £4.50. Now, I couldn't buy it with my ISA. If I bought it outside the ISA, I'd be facing, right now, because the tax year's ended, and because I've taken some profits along the way, I'd owe a big tax bill. So the joy of spread betting is, I haven't got that tax bill at all.

David:

OK, so can somebody both be a long investor, such as myself, and spread bet at the same time?

Robbie:

Absolutely. If you're long only, it's fine – you don't have to short with a spread bet, especially if you come up against a share that you like that's in AIM. There's a number of shares that are quite big that would almost be in the FTSE 100 that actually are in AIM that you have to pay tax on. So you could use spread betting, to take your example, and you're a long-term holder, you could simply use spread betting in that way. There's not much in it over ... how long do you hold – you hold your shares forever?

David:

I do hold them forever! How did you know?

Robbie:

You just seemed that kind of ...

David:

That boring type of person?

Robbie:

No; boring is good. You've got a very expensive shirt on there, you've obviously got ... I don't know how much The Motley Fool pay you, but probably you make quite a lot on the side from share dealing, hopefully, and that's great. Actually, the spread betting firms will tell you that the longer-term holders are the ones that win more than the short-termers and your trading strategy is absolutely quite right. You're doing the classic thing, which people get the wrong way, and you're buying at the height of fear, you've bought most of your shares at the height of fear when it's all going down, so you've got some great prices. 

The best time to sell is when everyone's smug and think they're king of the universe. This is what everybody gets wrong. That's why probably 70 or 80% of people lose. When everyone's scared, they're just overly stubborn at the same time. That's the perfect time to buy. But you can do that with spread betting as well, plus you get the dividends with a spread bet. Different firms play it different ways, but you do get credits on your dividends with your spread bet as well, and you can hold the spread bet for as long as you like, you can hold it for three or four years. 

But generally with a spread bet, every three months they close your bet and re-open it, so you pay a little bit every three months just to hold it open. So it does cost a bit more after, say, six months. It might cost you a bit more, but not so much as it really matters. If you've got a great share, like Aggreko, the extra cost doesn't matter to me, because it's fine.

David:

Are there any situations that you can see where somebody might be long on a particular share? – in other words, holding that share for the long term, such as say Unilever, which I've held for donkey's years, and at the same time put a spread bet on it falling?

Robbie:

People do that. That would blow my brain. I can't go long and short something at the same time. People do it; some people are just looking for a bit of short-term gain. I think hedge fund managers do it, don't they? They have like a pension fund, and then somebody says, I want to borrow some of your shares to short them, so pension funds lend out their funds for people to shorten and then give them back or whatever. 

So a lot of people like short-term shorting, but the reason I don't do it is, things happen so quickly that you can get caught out by a big stock market rise very quickly. The other thing with it is, if you do that with spread betting, you have to be at your computer all the time, because if you're very short-term, you have to keep checking the price all the time, and that would drive me bonkers. Being reasonably lazy, I'd rather be doing other things than sitting in front of a computer all day.

The other thing we should talk about is trailing stop losses, stop losses with your broker, which just means that you say to yourself, the share price is £5, my trading stop loss is 50p. So if it comes down 50p off the high, it gets sold automatically. But what happens is, it rises with the profits, and you're locking in profit all the time, and your profit is taking on emotionally, you've set where your target is – that's what you want, that's the money you want to make from the share. 

But if the share carries on going up, like Aggreko, that would still keep going up under the share price very nicely, and it would only get closed out if something really horrible happened to Aggreko. It would get closed out, but your profit would be banked. I think these trading stop losses are very ... especially if people have got a job, and maybe they can only look at the screen once or twice a week, or once or twice a day. It's just a little bit of a comfort blanket or a bit of insurance, and your profit will be locked. You can always buy the share back again, but your profit will be locked in to your spread bet account. So I do like trading stops.

They're coming up with things all the time which help, because I think the spread bet firms realise that people are worried about losing all their money. I think the guaranteed stop loss, if you're starting out, is a great tool, and would save you over and over again, if you buy something that has a profits warning overnight. You can sleep at night, whereas actually, if you'd had it as a share, you would have lost 50%; with the spread bet, you wouldn't have lost 50%. So that's another reason for looking at it. You're getting kind of vaguely interested? You probably never will put a spread bet on, but you seem just vaguely interested?

David:

But there's a big difference between the two, and we have to stress this very carefully – you might lose, if you were to buy the share outright. You might lose 50% of the money you have in the share, but you still own the share at the end of the day. With a spread bet, you don't any more, because you've actually been stopped out of it and you've actually lost the money. But in my case, if I'd bought the share and it fell 50%, I still own the physical shares, and I can wait for the shares to go back up again. With a spread bet, you can't.

Robbie:

Yes. You don't have to have a stop loss. You could just treat a spread bet as an ordinary ... there's no-one forcing you to have a stop loss on it, or you could set your stop loss at 80%, if you don't want to get stopped out – just knock it off. In fact, you're quite right – I don't actually personally have stocks with some of the smaller AIM companies, because I feel that I don't want to get stopped out on the volatile, and I'm pretty certain I'm going to hold onto them for two or three years. So I either put the stock very low, or I'm out of it completely. 

You could really use spread betting just as you would as a normal account, as you would normally buy a share. Just use spread betting as normal. Remember, there's no commission or stamp duty to pay, because obviously, being a wealthy man, probably some of your trades are quite big, so I'd imagine your average trade is about a hundred grand, isn't it? – so stamp duty on that is, what? – quite a lot, £500. So with a spread bet, you don't have to pay that £500. So I can see, you're still dubious, but you're maybe warming to it gradually. I'm trying to think how else I can persuade you, really.

The one thing that people do badly, I think, is they decide I'm going to trade currencies. They like forex – really gets people going; I don't know why, especially blokes. They love the word 'forex', which is trading on currencies. They tell me 99% of people lose on forex, so why ... I get people emailing me and going, "I want to get into forex". I go, well good luck, enjoy, enjoy the losses, and have fun.

David:

Because they want to be that 1% that actually makes the money?

Robbie:

Yes, well I think what they like, what a lot of the blokes like, is stuff that goes up and down quickly. They want a quick fix, that is what people do. I think that's where the gambling addiction could come in.

David:

So why do people lose money on forex trading, then?

Robbie:

I think it's so volatile, I've no idea how it goes up or down myself. I think they just overdo it and they want to make a few quick points here or there. I think what they do is also, if you look at magazines and stuff, you'll see tonnes of adverts for forex systems. Everyone out there, if you walk down the street, somebody will sell you a forex system which will definitely make you money. 

David, my system will make you money. If you'd like to give me five grand plus VAT, here's my system. You're going to make loads of money on forex, definitely. Just don't phone me when you start losing, and ask for your money back from the system, because I can't give you a refund.

David:

And you're saying that the systems don't really work?

Robbie:

I don't believe so, no. I don't think any systems work, is my viewpoint. I think good common-sense, a little bit of detective work, and what you do, which is, buy on extreme fear days at a good prices and hold onto them. But you can do with spread betting, just as you can with other things. I've had Dialight open for a year and a half on a spread bet, no problem on that. That just keeps going.

The other thing is, with your keen mind and your analysing of companies is, there is money to be made from shorting. For example, Yell.com, I made a lovely load of money. I think I shorted it at 60p, it had a debt of half the gross national product of Britain. I think it made about ten or 20 million but it had a debt of four billion. What's not to hate about Yell? – it's a short, all the way down. I think it's 9p now, or 10p, but you could have made 60 times your stake. If you could find a company that goes bust on you, and you've shorted it, fantastic – you've made tonnes of money. Even better, say you'd shorted Northern Rock or any of those banks when they were £6, or Barclays when they were £6, during that time when everyone was panicking, you'd have made an absolute fortune shorting.

So you could argue, when you think everybody's smug and it's the top of the market, is a great time to go short, and you could make money on shares going down. It feels quite nice, I don't know why – you've made money on something going down. Some people though, say, burn the shorters, and the shorters re accused of driving the markets down. 

I don't tend to agree with that; I think they actually provide quite a lot of liquidity to the market, so I don't necessarily subscribe to the view. Nowadays, when somebody's share goes down a half, it's not "I got it wrong" or, "The company's crap"; it's, "The shorters did it – it's all their fault." But people always blame everybody else; if somebody loses money, it's always everybody else's fault and not all their fault, it happens. In fact, somebody sent me an email, and I said, I wrote them back – they were expecting me to agree with them, and I said, "Actually it's your fault you lost money". The next email I got was a completely heap of abuse, using words which I couldn't possibly say here. But I obviously touched a nerve; it was his fault. If you lose money in the market, you haven't done your research, it's your fault and not anybody else's.

So with spread betting, you can buy good, strong companies, like you do, and hold onto them, and make money tax-free.

David:

And if somebody was interested (this is my final question), if somebody was interested in setting up spread betting, and I'm not here promoting spread betting, but if somebody were interested in doing so, how many spread bets should they have on at any one time?

Robbie:

Oh, my goodness me! I personally wouldn't have more than probably 12, I would say would be my maximum. Yes, 12 bets is good. The other thing I think to say is that actually, spread betting, the spreads have got quite tight, because there's so many spread betting firms competing, that actually it's pretty good value now. The little extra spread they charge you isn't that much any more. So it's getting to the stage where there's not an awful lot in it between just buying a share on the market ... you could transfer all your shares into spread betting, and you just trade as normal, and probably make as much money as you do already, David.

David:

You're desperately trying to get me over to the dark side, aren't you? I am a long-only investor, and you're trying to drag me over into the lions' den, and say, you can cuddle this lion in the corner there – he is not going to maul you.

Robbie:

No, I think if you bought your favoured Unilever, you'd buy it as a spread bet. You'll still make money on a spread bet, as you would with a normal share. You could buy five grands' worth of Unilever with a spread bet. If it goes up, you'll make your money – there's no problem at all. So, all tax-free, as well.

David:

I am almost tempted, now.

Robbie:

I don't think you are, really, but it's fair enough. I have to say, for me it's been fantastic, and I've made money out of it and I'm very happy with spread betting. Being somebody who's really actually, I'm not really long-term like you, but I'm medium-term. I think if you're a medium-term investor, you can make money out the spread, but I think if you're a long-term investor, you could make money out the spread. But actually, funnily enough, I think if you are a short-term, crazy gambler, you'll probably lose.

David:

That's not me.

Robbie:

That's not you – no, we know.

David:

I'm not short-term, nor am I crazy, nor am I a gambler.

Robbie:

OK, I believe you, David.

David:

Now, I have a couple of housekeeping chores to take care of before we end. The first housekeeping chore is to give away some copies of your book, and your book is called The Naked Trader's Guide to Spread Betting: How to make money from shares in up or down markets. In order to win a copy of this book, you have to give me the answer to this very very simple question. The question is, Robbie Burns is known as the Naked Trader. Can you tell me who is the Naked Chef, please? And please email your answers to moneytalk@fool.co.uk for your chance to win a copy of this book. You know that answer to that?

Robbie:

Yes, I admit to. Well, it's a bit of a good morning in the UK-type question, isn't it, because everybody knows the answer? But I suppose that's ...

David:

I want to give away copies of your book. I'm not going to ask people tough questions!

Robbie:

It's true. I brought five copies with me today as well, which I had to lug on the tube, so I'm quite glad to get rid of them, to be honest. Is the answer Rolf Harris?

David:

No, it's not Rolf Harris! Now, I have just one more chore, and that is to find a quote to sum up today's podcast. Today's quote comes from a professional gambler, believe it or not. His name is V P Pappy – what a great name! And V P Pappy said, "If you aren't just a little scared when you enter a casino, you are either very rich, or you haven't studied the games enough."

Robbie:

A very good quote, and that's quite apposite of spread betting as well actually, isn't it? It's the same kind of thing.

David:

And that is why you need a copy of Robbie Burns' book, so that you can be up on the games that are being played in the spread betting market.

Robbie:

I hope so.

David:

Thank you very much for coming in today, Robbie. It's been an absolute delight, as ever. Before you go, have you got another book coming out? So you have some excuse to come back into this office?

Robbie:

He even allows me to plug another book – that's pretty impressive. Yes, Naked Trader 3 should be out in September or October, which is an update to Naked Trader 2.

David:

Just in time for Christmas?

Robbie:

Yes, put it in your partner's Christmas stocking. Actually, it's quite a big book, so maybe not. You might just tear the bottom of the stocking, so be a bit careful about that. That updates a bit, and also the reason I wrote Naked Trader 3 was to talk about the down markets, and what happens when things go bad. Obviously, if you're David Kuo, you actually buy shares. If you're me, you might buy, but you might just do a bit of shorting as well, using spread betting.

David:

Can I just ask whether or not this lovely lady on the front cover of your book will be ...

Robbie:

Do you know what – I just knew you were going to come out with, you're obsessed, you're completely obsessed. You've been staring at her throughout the whole of this podcast, and that's why you've lost the thread of some of your questions.

David:

No, is this lovely lady going to be appearing in your third book, then?

Robbie:

I reckon she probably will be appearing in the third book, yes.

David:

She is absolutely amazing – I tell you why, because she hasn't aged at all.

Robbie:

She's incredible; she's ageless. There's probably lots of botox going in there.

David:

She is completely ageless, and she is wearing less and less each time, I've noticed.

Robbie:

It's funny that, isn't it? That's called marketing – nothing to do with me. I'll have to contact my publisher on that one.

David:

And so when your 20th book comes out?

Robbie:

Well, I'll probably have taken up that euthanasia idea we were discussing earlier.

David:

What's her name, by the way?

Robbie:

I've no idea at all. If you want me to put you in touch, then it probably can be arranged for a small fee. I'll take £100 plus VAT.

David:

Thank you very much. Now, this has been Money Talk, I have been David Kuo, and my guest has been Robbie Burns, author of Naked Trader's Guide to Spread Betting. If you have a comment about today's show, please let me know on the Money Talk web page, which you can find at fool.co.uk. Until next week, happy trading!

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

lotontech 09 May 2011 , 4:06pm

A nice, well-balanced discussion of the realities of spread betting and how to succeed -- or at least not fail too badly -- at it.

See also http://www.fool.co.uk/news/investing/2010/12/22/a-foolish-guide-to-spread-betting.aspx

TMFDragon 09 May 2011 , 6:59pm

Thanks, Tony.

I don't believe that somehow there is a magic spread betting recipe that we can follow for success. The market is a strange beast that does unexpected things. So, when when you are highly leveraged the consequences can be quite painful.

This podcast is not about how much money you can make but how much you could lose if things go wrong.

Best

David

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