Into More Cash but then….

I still have a sense of unease about the market and the economy in general but am not sure whether this is due to my pessimism about the effects of Brexit over the medium term and the current trading performance of my own company or a genuine sense that surely we are due a recession of some sort and a market pull back of some significance.

To that end when Focusrite dropped quite heavily last week I liquidated my position. It had never been a conviction purchase and so I was happy to see it go and increase my cash position by 27% to about 20% of the portfolio.

Then over the weekend I took a look at XLM. I hold this in my wife’s SIPP and it has performed very well. Like my other top up below this comes (in my mind) under the category of a seller of pans and shovels in the current tech gold rush. I cannot bring myself to purchase the likes of Amazon, Alphabet, Facebook etc at the current PE levels (AMZN is currently, according to Stockopedia on a 2018 PE of 140!) but could well imagine that I will purchase significant amounts in Amazon on any large (50%) pullback.

So on Sunday night I placed a limit order for XLM for a holding of 3.75% of the portfolio. For many (perhaps including myself) this is a bit of a nose holding stock but it is reducing its reliance on gambling traffic and while some things are off limits for me (tobacco, arms, the Tory Party), one could probably fine an “ethical” reason not to buy every stock and therefore XLM is ok for me.

Then this morning on positive news on the back of iPhone X sales for IQE (a stock I already hold) I added to my holding while the market was open. Something I try not to do but I think that this is a great stock and having read that this is Paul Scott’s largest long position I was emboldened to increase the holding to 6.54% of the portfolio. Averaging up is something that I have done often and successfully in this bull market and is something that I am very comfortable with.

This leaves me with 13.8% in cash. Perhaps slightly less than I would like but my wife’s SIPP is more than 50% cash, so I have plenty of funds to play with.

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On a bit of a downer

This was the worst performing week of the past two years with the portfolio down 3.965%. Leaving it up 56.91% YTD but off the high by some margin. Back at the beginning of September it was ahead 69%.

Several of my core holdings are, or nearly are, 20% off from their highs in a relatively short space of time. Of my five largest holdings only XPP has held up, indeed in the space of four weeks it is up around 30%. It remains a core holding.

BOO, BVXP, TET and FEVR, my four largest holdings are off between 16% and 20%, which hurts a bit when they are 53% of your ex-cash portfolio. With 17% of the portfolio now in cash these pull backs will present buying opportunities, for which I do have funds to take advantage.

So all in all not a great week. It is testing psychologically but knowing that there is no way I can time the market and that, in my opinion, most of the companies in the portfolio are sound in the long term, (only TET have I held for more than two years) I am happy to sit this out.

Randomness

This past couple of weeks I have been listening to “Fooled By Randomness” by Nicholas Nassim Taleb. It is readable, interesting, enjoyable and educational. Additionally, though, it is perplexing and I am looking forward to getting to the end, to see if there are any hard conclusions to be drawn.

He, Taleb, is contemptuous of many people, some of them rightly so, but others I am not sure whether it is justified. I am perplexed by some of his comments on the role of luck and survivorship bias on who we perceive to be good rather than just lucky investors. He does not seem to think Soros is a result of luck but I get the implication that he thinks Buffett is. Though I may have that completely wrong. I will certainly read the book soon, to get a better handle on what he is saying.

Anyway any investor who has not yet read it should rectify that omission as soon as possible; it has a lot to give.

Going to Cash

The portfolio finished the week up 0.95% on the week and 62.89% on the year.

XPP continued to perform well up 16.7% on the week and sits at about 10% of the portfolio.  Any significant pull back from these levels and I will certainly increase my position size.

The portfolio was helped along by ACSO up 7.87%, SOM up 4.91% and IQE up 4.89%.  The only real lagard was TET which was off 3.70%.

I have been listening to Howard Marks – The Most Important Thing and Nicholas Nassim Taleb – Fooled by Randomness, while driving or at the gym (much better for making the time pass that techno music!). Both of these have prompted me to put a little caution into my portfolio and I liquidated a small part of BOO, FEVR and BVXP on Friday afternoon.  This brings cash up to being my largest holding at 16.6% of my portfolio. This may just be a case of fixating on the latest piece of information but I think few would argue that the market might be getting ahead of itself. Of course the market (as someone more clever than me said) can stay irrational for a very long time, so it is a question whether I have liquidated to early or whether I should continue to liquidate further tranches of the portfolio.

It was a hard decision to sell even a small part of these holdings but as they represent nearly 50% of the portfolio selling part of these was the only option.

As for the future my inclination is to push this percentage up to 25%. That said I have fresh funds to deploy in the form of my wife’s SIPP, which is currently half in cash and is slowly being deployed with a strong valuation bias (with the exception of BVXP).

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.

This week

What I am reading this week?

What am I listening to:

What I am researching