How to enter a stock position in a stepwise fashion in a foreign small company – questions about EVO.ST
by lbj123 | December 16, 2023 4:49 am
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Source URL: https://www.stockgumshoe.com/2023/12/microblog-how-to-enter-a-stock-position-in-a-stepwise-fashion-in-a-foreign-small-company-questions-about-evo-st/
Just for clarity, every position in the $100K Lock Box portfolio is a 5% position, bought in a single purchase ($5,000 each, 20 positions, each locked for five years).
In the Real Money Portfolio, I am much more likely to move slowly in building a position. In terms of the logistics of that, it really depends on an individual’s portfolio and situation and how much risk you want to take in an individual name. I most often buy an entry level position that is somewhere in the 0.25-0.5% range when I’m first getting involved with a new position, sometimes more when it’s a company that I think is a more urgent opportunity or an unusually safe investment where I have a really good understanding already of the company, and the goal, as that position matures, is to build it up to a ~2% position if it’s a relatively high-risk, high-growth idea, or a ~4% position if it’s a bit less volatile.
With companies where trading is either more illiquid or more expensive, either because it’s on a foreign exchange where the commissions are higher or the trading just requires a bit more effort on my part, I’m likely to make those add-on buys in somewhat bigger chunks, but even then I’m usually quite gradual. It mostly depends on the ease of trading and the per-trade costs — and, of course, on whether the stock price remains attractive. Sometimes I never buy more of a stock, because I never again find the valuation attractive, that part is driven by what happens to the stock price and to the business after my first purchase, so the filling out of a position is not at all predetermined… some positions stay down near the bottom of my portfolio even if they do reasonably well, just because I never had an opportunity to buy more at a price that I thought was worthwhile.
With very liquid US companies I might be much slower and bump them up one tenth of a percent at a time, buying a little bit whenever the pricing looks attractive…. with Brown & Brown (BRO), for example, I bought what is now a full position (~4%) through a series of 18 purchases over 3-1/2 years. I’ve bought Berkshire Hathaway (BRK-B) almost 30 times now, though that’s over close to 20 years.
There are lots of strategies for building a position, and for adding to it over time (or trading around it, for some folks). I think the easiest generic strategy is to imagine what a “full” position would be, in dollar terms, and break that up into three or four chunks (ie, a $10,000 position might mean four $2,500 purchases) — if you want to be more active, you can put your plan in writing to buy more if it hits X valuation in the next three months, or some other criteria that works for you… if you want to be more passive with a stake you intend to hold for a long time, you can just say you’ll split the purchase up over three or six months, aiming to get an average price. You can’t predict how the future will unfold, and your understanding of a company will change once you’ve followed it for months (or years), but it’s good to have a little bit of a plan.
For what it’s worth, I think 0.5% is a reasonable initial position size, but I do also think that commissions have to be considered. If 0.5% is only five shares, and your broker charges a $50 foreign transaction fee, for example (sounds terrible, but some do), I might try to make my purchases larger so that the fee has a smaller impact on my per-share purchase price. Or wait until my portfolio is much larger before I mess around with higher-fee investments like that. A transaction fee of more than 1% would be a major deterrent for me, I’d have to REALLY like the company’s prospects.
In terms of the different shares, a lot of that just depends on what your broker makes available to you, and how their commissions/fees work.
EVVTY is an unsponsored ADR, so the shares are held in trust (by a Swedish bank in this case, I think), and they issue shares to you, so there’s an intermediary that often charges a small fee. “Unsponsored” means the company (Evolution, in this case) is not involved in sponsoring the ADR trading, and doesn’t absorb any fees that might be created by that ADR management.
EVGGF is a “foreign ordinary” OTC listing, so it’s just the regular shares of Evolution, bought probably by a market maker on behalf of your broker, and really the OTC ticker is just used to record those foreign shares in a US account (or to trade the shares, though often these kinds of shares don’t trade much). Charles Schwab has a good page that runs through the different kinds of over-the-counter traded foreign stocks.
In practical terms, for most US investors it’s likely to be mostly about liquidity and trading cost. I just checked on Fidelity, for example, and they charge a $50 transaction for for trading the foreign ordinaries (EVGGF), probably mostly the fee is for dealing with a market maker who will buy the shares for you in Stockholm… but for EVVTY they do not charge a foreign fee.
That makes EVVTY more appealing if you’re going to buy in smaller chunks and build it up over time, made easier by the fact that EVVTY shares are also much more liquid in US OTC trading, which means they’ll probably be easier to sell if you want to sell in the future, particularly if you want to sell when the Stockholm market is closed (after ~11am or so NY Time, depending on daylight savings time). Liquidity is helpful for buying, but it’s far more important for selling.
The one downside there is the ongoing cost for the ADR if the issuing bank charges a small fee, most often that happens by shaving off a bit of the dividend, but if you’re dealing with small positions it would probably take a lot of ADR fees to catch up with that $50 transaction fee. One site I checked indicated that the annual fee for this one is five cents/share, taken out of the dividend before that is passed along to you… so that’s pretty minimal. With less than 1,000 shares, the ADR EVVTY might be more cost-effective than buying the foreign ordinaries if your broker charges a fee for EVGGF. If your broker doesn’t charge a fee, then EVGGF might be the more cost-effective option… but note that EVGGF is also less liquid most of the time, so the pricing you get when buying or selling might not be as good, which could easily be enough to make up the difference if the ADR fee is only five cents/year.
Whenever buying a foreign-listed stock that trades mostly in Europe or Latin America, it’s always best to do so when that exchange is open — for most European exchanges, you can do that in the first hour or two of the NY trading day, which means you can see the live price in Stockholm (or London, or Frankfurt, or wherever), convert the currency as necessary, and place a limit order at a fair price with your broker. Those orders, whether buy or sell, are much more likely to be filled if the home exchange is open, because the “real” price will be fresh. Don’t ever place “market” orders for OTC securities of any kind, the liquidity is often so low that you could luck into a terrible trade at a ridiculous price… EVO is not so bad on that front, since it’s a large company and is well-known in the US, but some smaller OTC-traded overseas companies are dramatically less liquid, and sometimes don’t ever trade every day in the US, so this kind of foreign investing often requires some patience.
I prefer to trade on the home exchange whenever possible, so I used Interactive Brokers to buy direct in Stockholm at EVO at low cost. That may not be worthwhile if you don’t do a lot of overseas investing, but I do like that broker.