Quarterly Review Q2 2021

Set Backs

Until the week ending 18th June it was looking to be a good quarter but BOTB’s appallingly worded Trading Update put an end to that. With the return YTD halving from 12.2% on 30th April to 3.9% as I write on 30th June. This compares with the FTSE All-World which us up 6.8% and my own benchmark which is up 10.5%. (My own benchmark is an even split between Buffettology, Fundsmith, Blue Whale Growth & Vanguard S&P500 ETF).

This followed hard on the heals on another trading update from NCYT, which saw the share price decline by 42% in a single day after they had announce that their contract with the DOH would not be extended. I had wrote in my last quarter update (31st March 2021):

“this has served me well and I am really not sure there is much visibility as to what the future holds,”

As I find quite often my perception was correct but my ability to act was found wanting and 8 days later, the bad news hit.

Then days later we get the, what appears to be, botched IPO of TRMR on the NASDAQ, when hopes had been, from shareholders, that this would give a fillip to the share price, but in fact caused a sharp decline in the share price. The stock is beginning to recover somewhat and is currently 13% off its ATH and 82% YTD and 51% on my initial purchase. The entire holding is up 42.3%

These have been the three major set backs for the quarter and the year is not panning out as I hoped. While some of my holdings RCH, TRMR, SLP, VLX and ERGO have performed well (all >+20% YTD) the portfolio is being held back by the terrible performance YTD of my three largest holdings AAZ, BOO and GAW. YTD they are +6.46%, -7.99% and 3.75%.

It has certainly led to me questioning my investing abilities. Prior to 2020 things had been working well:

YearReturn
2008-7.10%
200927.40%
20109.10%
2011-16.40%
20126.20%
201379.70%
2014-24.20%
201516.00%
201630.70%
201728.10%
2018-9.60%
201927.10%
20200.00%

But now I question whether this was beginners luck?

Position Waiting

All this negativity has got me thinking can I really, when I am only selecting 15 stocks, know which ones are going to perform better than another over any particular time frame and therefore does being heavily over-weight in a limited number of stocks – 53% in five stocks, 82% in 10 stocks – make sense?

I like to think that I know AAZ will be at least double where it is now within two or three years, that BOO will worth north of £12 within five years and GAW, well who knows where GAW will be in five years by now?

But the reality is that I don’t know and combined with the inherent volatility in some (all) of the stocks I own, it strikes me that it might make more sense reduce the size of holding in any one stock.

Most importantly I think it would reduce my stress levels!

I am therefore considering rebalancing the portfolio to a split as follows:

  • 7.5% – 5 stocks
  • 5.0% – 10 stocks
  • 2.5% – 4 stocks
  • 2.5% – Cash

I would then rigorously rebalance on a quarterly basis, if a holding had moved far from its original position size. There is a danger here that I would not be letting my winners run (but winners only run for so long) but more on that in the next section) and this would have the advantage of locking in some gains while leaving the holding to grow.

This would lead to more activity but possibly for the better, as I think I would be able to sleep (literally) more easily at night.

The other course of action or possibly complimentary course of action is to move a proportion of the portfolio, say 25% to start with in to funds. Probably into those described above that make up my bench mark. YTD figures in brackets:

  • Castlefield Buffettology – 6.49%
  • Fundsmith – 13.1%
  • Blue Whale – 10.7%
  • Vanguard S&P500 ETF – 14.5%

But then again I still have this nagging belief (arrogance?) in myself that over the medium to long term I can do better than Keith Ashworth Lord, Terry Smith and Stephen Yiu!!

If you follow me on Twitter I will tweet this out if I decide to go this route.

Thinking Long Term

One reads much about thinking long term, running your winners and taking a 40 year view.

I was most recently triggered on this by a tweet from @Gautam_Baid where he tweeted an image of Charles Schwab with the quote:

“Look at a chart of the S&P 500® Index over 40 years and you see an endless series of jagged peaks and valleys. Each one of those downs and ups is a moment of panic or elation. But step back for a wider view and you see the inevitable direction is up. Stick with it and ride out the emotions and you’re an investor.”

Charles Schwab www.schwab.com/resource-center/insights/content/sneak-peek-charles-schwabs-new-memoir-invested

and the tweet was “Stay the course”.

I greatly admire Gautam Baid’s book The Joys of Compounding but I take issue with the whole wait 40 years and everything will be all right!

People Don’t Have 40 Years

In general in there 20’s people are working to pay the rent, in their 30’s and 40’s the mortgage and the family and possibly committing every spare penny to making sure their business thrives. Then in their 50’s, if they are lucky, they will have a significant (in terms of their lifestyle) amount of money saved to invest from which they will need to draw in the next 10 to 30 years.

They don’t have 40 years to enable them to take a 40 year view. Therefore much care needs to be taken when one commits money to an investment and into which companies or sectors. The extreme example is 30 August 1929 when the Dow peaked at 380.3 and did not regain this level again until 23 November 1954.

The twin of this is the buy and hold forever to maximise returns maxim. Running a quick screen on LSE stocks yields just twelve still listed companies as of 1st July (of course there could be companies that have been taken over that met this criteria) that have a CAGR total return greater than 20% (44 companies greater than 15% and 157 companies greater than 10%).

Bringing the holding the period down yields the following (number in brackets number of companies with total return CAGR of 15% and 10%)

15 years – 27 companies (69 & 196)

10 years – 96 companies (195 & 382)

5 years – 261 companies (411 & 600)

So for every Dominos (22.7%) or JD Sports (21.5%) there 205 companies that have shown a negative CARG over 20 years.

I leave the reader to draw their own conclusions.

Trades

So one area where I have been able to stick to my guns has been trading or rather not trading. I have only made seven trades.

Bought BOTB in the open offer at £24

At the time I thought this was a bargain. As it would appear did Mark Slater. I wonder what he is thinking now? Hoodwinked or a buying opportunity?

Sold out of MGNI at $39.045 for a small loss.

This was never a conviction buy and should never have been bought.

Sold 12.5% of my holding in ERGO at £10.97 for 258.7% profit in 18 months

This was just a portfolio sizing/risk management sale. Ergomed remains my fifth largest holding.

NCYT Sold out

My total return on NCYT was 58.7% or a 67.2% CAGR but with proper risk management this could have been so much higher and I let the holding get far too large for the risk inherent in the stock.

I had sold some at £9.65 in Oct 2020, £7.83 in Nov 2020 and £8.53 in Jan 2021 but this was not enough. I must learn to size relative to risk.

SAGA Bought and sold within the month for a small profit. Saga could be a good recovery play but I am in love with Venice (I own a small flat there) and Saga send cruise liners to the Venetian Lagoon, which I cannot support.

From an investing point of view this may be a mistake (Paul Scott certainly would think so) but there we go.

ESC I took a 1% of portfolio position size in Escape Hunt at 40p. Whether I will invest at scale is a work in progress.

Current Holdings

AAZ

AAZ continues to be under-appreciated by the market but I am currently happy to be patient. In the past 12 months I have received dividends equivalent to 7% of my holding and see it as a safe haven in the current times.

Currently a 12.7% position I may reduce to 10% in the context of what I have written about position waiting above.

BOO

BOO continues to receive stick from certain quarters of the media (The Guardian, The FT and a lesser extent the BBC) but I actually think that with the changes put in place by management, Boohoo is now a very ESG friendly company and it is only a matter of time before this is realised (and the press get bored and move on to their next target).

Revenue growth continues to be excellent particularly impressive was the 43% growth in sales in the US for the first quarter from £92m to £131m. It looks almost certain that US sales will top half a billion pounds in FY 2022. Assuming the continue to execute (always a big assumption with any company trying to “break” America”, taking into account the sales runway that they have in the States, it is possible that US sales could over take UK sales within five years.

Currently a 12.3% holding, which I may reduce to 10% but the valuation in my opinion is ridiculous, so cutting it to 10% will be hard.

SLP

Sylvania Platinum like many of my holdings is off the high point reached on May 10th. The thesis for a £2/£2.50 share price remains intact.

TTD, APPS and TRMR

The Trade Desk and Digital Turbine had a nice fillip towards the end of the quarter with Google’s announcement that the phasing out of cookies would be delayed until late 2023. TTD is up 32.7% in the last month (17.4% on the quarter) , APPS 12.3% (and down 7.58% on the quarter) but Tremor down 10.7% on the month and down 1.0% on the quarter. As always Tremor failed to follow the leaders! The 12% fall from the high is without foundation and I would expect the share price to recover over the coming months.

VLX

Volex’s prelims on June 2017 showed the company to be still on track for its £650m revenue, £65m operating profit target by 2024.

I could write a lot more but I have probably lost most readers by now so I will leave there for now. It has been a dreadful 15 months for me and only time will tell whether the second half 2021 will be any better.

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