Returns

This post came out of a DM from Des on Stockopedia and I thought it might be worth posting here.

The DM came out of the fact that I posted my returns for the past three years in comment in a Stockopedia column which have been as follows:

  • 2015 – 17.4%
  • 2016 – 34.2%
  • 2017 YTD – 63.2%

To give you a brief background, I inherited about £160k in late 2008 but all of it was initially tied up keeping my business afloat after the financial crisis.

So it was not until the end of 2014 that I had in excess of £100k invested and the end of 2015 that all the funds were available for investment. In August 2015 I had also transferred in a couple of smallish money purchase pension pots to the value of £69K into a SIPP.

The history of my investments is:

Date Cost Value Div Interest

31/12/2009

£ 6,596

£ 7,408 £ 52

£ 384

31/12/2010

£ 23,421

£ 26,862 £ 488

£ 853

31/12/2011

£ 32,582

£ 28,461 £ 1,244

£ 1,266

31/12/2012

£ 50,167

£ 48,360 £ 3,518

£ 1,526

31/12/2013

£ 58,235

£ 73,404 £ 4,238

£ 1,689

31/12/2014

£ 78,424

£ 94,811 £ 6,980

£ 1,956

31/12/2015

£ 148,561

£ 187,648 £ 11,155

£ 2,019

31/12/2016

£ 202,831

£ 274,414 £ 16,615

£ 2,083

21/09/2017

£ 273,270 £ 497,662 £ 20,864

£ 2,092

I read voraciously (but at the moment less than I would like to as there seems to be a lot of calls on my time) and have scores of books on my Kindle and many still unread. You can see a fairly complete list at

https://investing4value.wordpress.com/books/

I have not read them all, so it is a work in progress. I have read all the Buffett letters and my current reading project is the memos of Howard Marks of Oaktree Capital.

https://www.oaktreecapital.com/insights/howard-marks-memos

I subscribed to Investors Chronicle and Shares, ADVFN and Stockopedia from May 2012. I gave up on IC pretty quickly (they seem to recommend every stock in the space of a year) and ADVFN is a nonsense and I unsubscribed ages ago.

I have watched a lot of stuff on YouTube but I do struggle at the moment to find the time I would like to dedicate to the learning side of things because of my business commitments.

I listen to all the Invest like the Best Podcasts by Patrick O’Shaughnessy.

I do read some more obscure stuff if I can find the time

http://www.grahamanddoddsville.net/

https://microcapclub.com/

http://awealthofcommonsense.com/

https://www.manualofideas.com/ I am a member but hardly use it and am about cancel my sub in favour of:

http://www.valueinvestorinsight.com/

I followed twitter for quite a while but stopped after reading Deep Work by Cal Newport but having heard that virtually the first thing that Michael Maubassin does in the morning is look at his Twitter feed I may go back to it.

Finally I read without fail the SCVR on Stockopedia everyday and always check what Paul and Graham have to say on a company before I bother to research it further.

In terms of how I have achieved the returns I have, I would put down to several things:

  • A rising market
  • Patience
  • Learning from my mistakes
  • Luck
  • Concentrated portfolio
  • Investing in “good” companies
  • A long term view

Taking those in order

A Rising Market: Since I started investing I have been lucky enough to be investing into a generally rising market. This softens any mistakes and enables one to learn as you go along with reduced pain.

If there is one thing that my reading and my mistakes have taught me it is that one needs to be patient. Good examples of where I have sold too early are Apple which I sold in May 2016 at $96 for a 50% gain and Clinigen which I sold after a year in March 2014 for a 120% gain but it has doubled since that point so my initial investment would have five bagged by now! A good example of where I haven’t is BOO which I bought in November 2015 and three times after that and have not sold any of the holding since. One third of my gain is in BooHoo.

I have occasionally invested without a good reason (RBG, Eurasian, Craw) and these have been a disaster.

Luck is luck

Concentrated Portfolio: 75% of my portfolio is in 6 stocks and 50% in three. Those are:

  • BOO
  • BVXP
  • FEVR
  • TET
  • XPP
  • AIR

I have continued to hold these despite meteoric rises and the occasional sell off (FEVR is going through one at the moment) in the belief that they are sound (even outstanding) companies that will strongly outperform the market over the long term.

It is hard to find good companies, so if I can’t find something that I assess to be as good or better than an existing holding I would rather stay in cash or top up an existing holding. BVXP and SOM (SOM is seventh largest holding) are great examples of companies that I will invest more funds in if they pull back 10%+.

I am aware that concentrated portfolios in general are frowned upon (particularly by the guys at Stockopedia) but I am convinced that beyond 15 (certainly 20) stocks you are going to become a closet indexer. If you have 20 stocks and invest 5% in each, none are going to make a significant impact. And if say the last 10 are 10% of your portfolio what is the point? I have 6 like that

  • DIS 3.7%
  • AVAP 3.5%
  • IQE 2.6%
  • ACSO 1.9%
  • AVON 1.1%
  • AMZN 0.8%

which I should probably cull or increase the holding so that they make an impact on the portfolio if they fall or rise.

If one has 30, 40 or 50 stocks in a folio that you are constantly trading in and out of I just do not think it is worth the effort and one would be better of investing in half a dozen ETF’s (or one) and going off to do something else.

The one reason I can see for having investments in more than 15 stocks (at most) is that stocks in which one has money invested you tend to keep a better eye on and investigate more. I think it is just psychology. I have a watch list but never remember to study it!

I am constrained by the fact that I like them all but not enough to sell parts of my larger holdings to rebalance the portfolio.

Investing in Good Companies: I have dabbled in scores of stocks over the past five years and I have progressed towards investing in only what I deem to be great businesses. How do I define this?

  • High levels of ROCE, Operating Margin, ROE, ROA
  • No or low (max 2 x Net Profit) debt
  • Ideally paying a dividend
  • Some sort of niche or moat (BOO, SOM, BVXP, TET are really good examples of this IMO).
  • Honest management
  • Visibility as to where the growth is going to come from.

Certain areas are off limits:

  • Resource stocks
  • Blue Sky
  • Roll outs
  • Loss making

I also look at the Stock Ranks on Stockopedia and what various commentators (Scott, Lee, Beddard etc) have to say about a stock. You can gain a lot of insight from what they say and why repeat work they have already done and done better.

A Long Term View: you could argue this is similar to patience. I invest with a 10 year view. I believe that this is a real edge. Everybody seems to be looking at price movements over months and trying to guess where the price will be in a couple of months time.

But if I look at the stocks that I invest in I ask the question “is xyz stock going to, over a 10 year period, exceed a. the market b. an alternative stock. If the answer is yes then why would I sell?

Stock Picking: I am very weak in this area and that is one of the reasons I am not totally certain my past performance is repeatable but I do think as I get more time to devote to investing, then this area will improve.

Very few of my stocks come out of pure original research. FEVR and DIS are the exceptions of my current holdings. That said none are based purely on a “tip” i.e. Paul Scott said it was good so I bought it.

The way I work is I hear of a stock via a blog or article and look into it a bit in terms of the metrics mentioned above and if I like it I will initiate a position and then if all is going right I will average up. This is something I have learnt to be comfortable with and has really worked for me in the current bull market.

Selling

I try not to sell but I can still get impatient and that is something that I would like to control. I would like to be more in cash in the current market and am thinking of selling of the smaller holdings mentioned above, which would double my cash but of course in some way increase the concentration of the portfolio.

Conclusion

I could go on (I enjoy the exercise of writing and certainly wish I could find the time to write more) but I have probably bored you enough for now!

I would just conclude by saying that though I am pleased with my record I think it is yet to stand the test of time. I have not been through a severe market pull back, which will be the real test. I am rereading (well listening to while at the gym, it makes the time go much faster than music) “The Most Important Thing” – Howard Marks and he has some really interesting things to say about risk. Come back in five years and see where I am! I am comforted by the fact that if you look at a graph of any of the major indices the declines (even the bad ones 1987 and 2007/08) are just downward blips on a general increase in value, as long as you were patient and did not sell at the bottom and buy back in at the top!

I hope this has been of interest.

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One thought on “Returns”

  1. Great post. Seems like all the reading is certainly paying off. I am in the process of bulking out my book collection. I try to keep my portfolio below 10 stocks and really believe concentrating your portfolio in the best ideas is the way to achieve great performance. Hope you keep posting and do become more active on twitter. I’ve just started to up my activity there. Lot of great posters who share a lot of gems and alternate views.

    Like

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