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.

Advertisements

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 thought it might be worth posting here.

The DM came out of the fact that I post my returns for the past three years 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 the whole lot 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 an incomplete 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 are 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 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

AVS

This should have been published the day after AVS agreed to a takeover but for some reason that didn’t happen. 

I posted back in September:
“I also topped up Avesco. This is a sound undervalued company with good metrics and Stockranks. I anticipate continuing to buy this on the way so that it joins BOO, FEVR and BVXP as fourth heavily over weight holding in the portfolio.”

AVS is currently 5% of the portfolio”

As many (though not if you read the FT, it is not even mentioned) of you will know now AVS was on the end of an agreed takeover offer from NEP Group Inc yesterday (RNS) at a 125% premium to the  Wednesday 16th closing price. 

To see the RNS come through and then take in what it meant was an amazing sensation.  Though whether it will ever be repeated to this degree I am not sure. 

It was Paul Scott over Stockopedia on his SCVR who lit the spark.  I would love to be able to say and as wrote in column yesterday:

“Unfortunately (or fortunately!) I don’t have the time to analyse the s@&t out of stocks and looking back at my notes I was simply attracted by the ROA etc figures, the divi growth and the fact that it on Stockopedia figures it was trading below book. That was enough for me.”

I still have a business test takes up huge amounts of my time and this simply does not leave the time to spend ages and ages on analysing a stock to make sure it is not a mistake waiting to happen. But I believe:

  • The only way to learn is to be in the market and learning from what you do wrong and right
  • In the current enviroment there is simply no point in leaving ones money sitting in the bank account

So I continue to invest, read and learn as I go along. Yes there have been some bumps along the way and we have been in a generally rising market but I am well ahead of any metric you want to use. Now I must make sure I am not complacent. 

Anyway back to AVS. Before yesterday AVS was about 6% of my ex-cash portfolio and was my 6th largest holding and it had been my intention to top up to the 10% of portfolio level. As I write (18/11/16 10:07) it is now 14.1% of my portfolio showing a gain of £20,592. Most, though not all, of that came yesterday.