Past Two Weeks Shenanigans

I thought I would write a quick post about the last couple of weeks volatility in the stock markets.

This was the first time I had experienced a severe downturn in my portfolio and had to be tested to maintain my philosophy of buy and hold good companies for the long term. I did stand firm. I looked at charts of the S&P for the past 20, 30, 40 years to reassure myself that all dips are temporary and that over the long term are bearly noticeable in the general upward direction of the market.

Having in the week ending 9th February suffered (and I lose the term loosely as I didn’t realise any losses) my worse week in £ terms (down £27,341) it was followed by my best week in £ terms with the portfolio up £28,826 or 6.41% (on an ex cash basis).

I had no insight into whether the market was going to fall further or will fall further but it certainly doesn’t feel like 1929, so I will sit out this volatility and see where it takes me.

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Year in Review

53.5% Total Return for the Year

This post is pretty much complete but I will tidy it up over the next few days. I hope you like it.

Introduction

I began the year pretty sanguine about where the stock market would go. I am an arch remainer and believe that Brexit is a disaster for the UK economy. I therefore anticipated that this would translate into lower stock prices. This has not been the case or at least not in the stocks in which I have been invested.

At the beginning of January, I was 19.5% in cash, not because of any sense of impending doom but because I am cautious about deploying my funds but when I do I tend to place large chunks in a small number of stocks and invest further as the price moves up.

I end the year with just 3.2% of my portfolio in cash.

Most of my holdings at the end of the year I had at the start but have topped up during the year as the price strengthened. It has been a year of steady progress but with most of the gains being made in the first 8 months.

I was up 69% on the 8th September.

I sold out of five holdings that I had at the beginning of the year

Character Group
CCT I only held for a month and so hardly counts as something I held. I simply sold because I actually did not know why I bought in the first place. Something I am still occasionally guilty of but less and less so as time goes on. It was fortuitous as I sold at 502p and the stock now stands at 435p

Dart
This is one of the few stocks that I have held, sold, bought back in to and then sold (I think it might be the only one). This was a mistake.

It is one of those stocks that re-enforces my belief that one of the few edges that the Private Investor has is to invest with a long time horizon. I first purchased back in February 2013 at 154p. I only invested £1,500 initially (the amounts I invested in those days were much smaller than now).

There followed three more buys at around the 250p and 270p mark, a nice stream of dividends as well. I then sold out in July 2016 at 476p, probably because of post referendum jitters. And while this was not the low, I should have continued to hold as the price is now around the 680p mark. DTG has a stock rank of 95 over at Stockopedia and is classed as a Super Stock.

Lamprell
LAM was my play on the low oil price but after 8 months of holding I decided that resource stocks are not for me, as they are subject to so many outside influences. In this instance it was a good call. I sold for a minute profit (£200) at 98p and the price has now fallen to 79p but it has been strengthening of late.

Laura Ashley
I have soft spot for ALY, as she was an acquaintance of my step grandmother and it looked like an greatly undervalued company in July 2016 and still undervalued in November 2016, when I bought some more. The market continued to disagree with me and I sold out in April 2017 for 44% loss. It was not a large holding at about 1% of the portfolio. The market still doesn’t like ALY as it currently stands at 7.7p and Stockopedia categorises it as a Value Trap.

Purple Bricks
This was an out and out trade. Very few stocks do I purchase with a short term horizon or rather do I have conviction to purchase with the view to making a short term profit.

I am convinced that one day the Estate Agency Market in the UK will be disrupted by the internet. I am not convinced either way as to whether that Purple Bricks will be the one to do it.

But in 2017 the market seemed to get the bit between the teeth as far as PURP was concerned and I road the price up from 155.8p (15/12/2016) to 408p and 381p when I sold out in early June to book a £19,172 profit on a £12,785 investment in less than 6 months.

I may or may not have the confidence to try and repeat trades like this again. It represented 4% of my portfolio at the time, so while not a huge position it was not without its downside risks.

HOLDINGS

So I finish the year with a total of 14 holdings; 11 I held at the beginning of the year and three (IQE, XLM and TAP) I purchased during the year. The breakdown as a percentage of portfolio as follows:

Stock VALUE AT 30/12/17 %age of Folio

BOO £63,920 12.87%

FEVR £57,585 11.60%

TET £55,637 11.20%

BVXP £51,401 10.35%

XPP £43,355 8.73%

XLM £39,309 7.92%

AIR £33,155 6.68%

SOM £31,451 6.33%

IQE £29,139 5.87%

ACSO £22,785 4.59%

DIS £18,363 3.70%

AVAP £15,646 3.15%

AVON £12,812 2.58%

TAP £6,389 1.29%

TOTAL £480,947

CASH £15,636

Total £496,583

I continue to run a concentrated portfolio with with my 5 largest holdings representing 54% of the portfolio and 75% of the portfolio being made up by just 9 holdings. I still believe that if you can’t name every stock in your portfolio, know what they do, have a good idea of the latest news on the company and where they are heading then you have too many stocks.  I don’t think you can do that as a part time PI with more than 15 at most 20 stocks.

Though meaningless I was hoping to end the year on £500,000 but as it was I finished just shy of this figure. But to say the least I am not disappointed with this years figures.

A total return this year of £172,865 and in percentage terms a 53.543% on my portfolio value at 1st January 2017. This compares with 34.19% in 2016 and 22.00% in 2015.

What do I attribute the above increases to.

  • Riding my winners. I did not (and to be honest I was never tempted to) take quick 20% profits when they arose.
  • Concentration
  • Don’t make things too complicated. I think if one over analyse a stock one will always find a reason not to invest.
  • Ignore drawdowns. That is Mr Market just messing with your head.

MISTAKES

It may be hubris but I feel my mistakes were ones of omission (thumb sucking as Buffett would say) than commission.

AMZN

I have been a long term bull of AMZN (and a long term fan of the company) but did not initiate a position of any size.

XLM

I was a bit late to the party on this one but now have an 8% position in my portfolio and about the same in wife’s. This holding is up 45% in 6 months.

IQE

Likewise I was late to initiate a holding but over two to three years I expect stellar things from IQE.

Lessons

My key principles were reinforced

• Long Term Horizon

• Trade infrequently

• Concentrated portfolio

• Continue reading

• Keep looking for ideas

• Record why you buy (you won’t remember!)

• Record various metrics (including Stockranks)

2018

I am going to resist making predictions for the coming year. Predictions are notoriously tricky especially when about the future. I will be more than happy if I achieve 15% in 2018 but I have some ideas that may enable me to improve on that.

However I will take a leaf out of John Rosier over at John’s Investment Chronicle (I can highly recommend subscribing, at £150 a year it is very good value) and give a brief overview of each of my stocks and where they might go in 2018.

ACSO

This maker of mobile ticketing and virtual queuing solutions finished the year ahead 31%. The stock trades on a pretty racy FPE of 55 but the market for its product is enormous. There are competitors but management have executed well over the past five years with sales up 300% and I believe company will continue to grow sales but also that new markets are very likely to open up for their offering. I will continue to hold through 2018.

AIR

This is my oldest holding, with my first purchase made in October 2012, back in the days when I knew less than I do now about what I am doing! It came to my attention through Lord Lee’s column in the FT and he has owned it continuously since 2003. It is has performed well for me and I see nothing to change my mind that this is a good company offering a niche serrvice. A threat that has been mentioned is that they could be “taken out” by an app but my experience is that the wealthy would rather make a quick phone call or use an agent and I don’t see an “UberAir” coming on the scene any time soon. A core holding with a near 4% dividend yield.

AVAP

This aircraft leasing company is perhaps misunderstood by the market. The company continues to grow steadily (it has tripled in size in five years and profits have quadrupled)but the share price has managed “only” a 2.7 fold increase, so I think there is more upside over the coming years.

AVON
This is one of my small holdings and lower conviction holds. That said it enjoys a Stockrank of 91, has great OM, ROA, ROCE and ROE figures. I think AVON could be a steady riser over the medium term but if I was looking for funds to redeploy AVON might be the one to go.

BOO
BOO really needs no introduction. Boohoo actually ended the year up “only” 38.9% but my holding is up 318% and the gain sitting in Boo represents a fifth of all my gains. Stockopedia’s computer has reclassified BOO as a “Falling Star”. I think in five years time the Stockopedia computers will be proved to have been wrong. Happy to hold with it representing 13% of my portfolio.

BVXP
BVXP is up 83% this year and my holding 102% (first purchased made in October 2015 but with top ups along the way). Most of the gains in 2017 were achieved in the first nine months of the year and since September the share has pulled back about 17%. I think partly because the price has been driven up on speculation and also because income stream from one of its products is about to drop out.

I remain firmly convinced that this is one of the greatest small caps on the London Stock Exchange.

DIS
I was in the short term a bit late on this one. I bought 23 shares for my son’s JISA back in January 2014 and with currency movements he is showing a healthy 80% gain. I think long term (10 years+) DIS will out perform the market. My only concern is that with a lack of deployable funds, would it be better invested elsewhere? TAP?

FEVR
This £2.5bil market cap is up 94% this year and has 10 bagged over the past five years and my original purchase is up 5 fold in the 27 months that I have held it. So what of the future? Coke turnover is around £1bill a quarter so with FEVR sales at around £133mil the company seems to have a lot of head room to grow.

The company trades on a very punchy FPE of 59 but the company has always managed to grow into its projections and OM(34.9%), ROA(29.1%), ROCE(41.7%) and ROE(42.7%) are all sparkling and gives me confidence to stay with the stock.

IQE
A new holding this year, with my initial purchase made in July and two subsequent purchases at the end of October. I have not done as much research on this as I should have and will rectify this this month.

SOM
Somero is a manafacturer of laser guided floor screeding equipment for commercial spaces in larger volumes. The stock continues to score well under Stockopedia’s Stockranks system, with an overall rank of 94 and trades on a low multiple of 14, is dividend paying and OM(27.4%), ROA(29.5%), ROCE(54.6%) and ROE(41.4%) all indicate a quality business and on top of all that shares in issue continue to drop.

There are concerns that the business is cyclical and that the next recession will bring problems but the company sits with the equivalent of 25% of sales in cash sitting on the balance sheet and I am confident that the company can ride out any economic storm that comes along. Very happy to have this as a long term hold.

TAP
My newest holding bought just before Christmas. It is a small holding at around 1% of the portfolio.

TET
Another core holding for me. This company has an in demand product protected by IP and management is predicting growth in demand and will be moving to a new site in the U.K. and are expanding their base in Florida. Stockopedia rates it as a Falling Star but over what period I don’t know. Another stock that I think in five and ten years time will prove the Stockopedia computers wrong and be substantially ahead of where it is now and of the market. 

XLM
Another dodgy internet advertising stock or growth engine?

XPP
This is one of my favourite stocks, which I have held for almost 6 years and has rewarded me hansomly. It is one of those stocks that I wished I had bourght more of back in 2012 but then I was still learning and taking things cautiously. I am still happy how I played things.

I hope to blog a bit more than in the past but this will depend on a few things.

Anyway thanks for reading and Happy Investing in 2018.

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.

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.