Well, we have now reached the end of the fourth quarter and hence the end of year 1 of the Passive v Reactive Whittler portfolios so it’s now time for a detailed review to see how my meddling has done compared to Mr Cool who simply sits on his hands and lets time do the work.
Just by way of a reminder, the ten stocks common to the three portfolios were identified via my routine free cash flow+ returns on capital screen i.e. they all exist within my whittled down universe from which I make the majority of my share purchases. At the time of entering the fourth quarter, I hold positions in seven of the ten companies: SOM, CCT, DTY, AMO, HIK, NFC & PSN. So that’s a financial interest in 70% of the stocks within this exercise and I am very grateful for the positive impact that the likes of SOM, AMO & NFC have brought to my ISA over the last 12 months.
I have long held the belief that investing via a basket of stocks approach is far preferable than “all your investment in one or two companies” approach; simply balances and reduces associated risks. To my view if you invest in a stock, there is always a risk that the stock may depreciate in value for one reason or another, maybe the dreaded profits warning or just simply falling out of favour. It certainly would be nice to pick winners with every share purchased but in reality that is just not going to happen; maybe as investors, we are right 5 or 6 times out of 10, hence the importance to my mind, of investing via a basket of stocks.
The basket of stocks performed admirably during the 12 months period and with dividends, the static version yielded a profit of 29% with dividends reinvested. In the Tinker version, eleven trades were made within the same population of stocks where I reacted to positive company trading updates, outlook statements and in one case, PSN, a Brexit opportunity. The only trade I regret was actually reacting to a touch of market noise in the form of a broker downgrade and decreasing my holding in Bodycote: strange one that as I always preach about avoiding market noise.
Overall this medalling within the Tinker boosted the annual performance to 31% compared to the 29% of the passive investment again with dividends reinvested. I would not say that extra 2% was massively significant and in reality was achieved by reallocating some investment from the average performers to the strong performers. My risk aversion probably cost the Tinker a couple of more percentage points of potential outperformance had I not dithered and taken a third extra allocation in the best performing stock, Somero which rose by 84% over the 12 month period. Other notable performers were Amino 58%, Next Fifteen Com 41%, Elementis 25%, AdEPT 20% & Bodycote 18%. Only one stock ended the year lower than it started, Hikma Pharma (2.5%). Interestingly HIK shows a positive total return in the Tinker as I sold the stock immediately following a mild profits warning and retained some profit from its previous good run. As can often happen even with a mild profits warning, the price can drift south for quite a few weeks.
How does this compare to my usual benchmark indices the FTSE All Share Total Return (ASX), well reasonably well as although this particular index had an excellent year at +24.2% over the identical 12 month period the passive outperformed by a few percent at 29% and the Tinker even more satisfying at 31% total return.
So after a very pleasing initial 12 months of the Tinker, it’s now time for the annual review of both the Tinker and the ASH. Remember the rules, of the three-year exercise are that the 3YL is simply the original 10 hopefully quality stocks selected and just left to their own devices for three years. The ASH (annual sit on hands) which had the same first year % composition throughout the initial 12 months as the 3YL and the Tinker will now have the current 10 stocks reappraised; some will be held and some will undoubtedly be replaced by current more attractive propositions to yield a set of 10 stocks for investment over the next 12 month period.
With both the ASH and the Tinker the total value of the portfolio will be equally rebalanced between the 10 selected stocks. The ASH will then, of course, remain unchanged in composition for the 12 months period whilst the funds in the Tinker may be reallocated between the 10 stocks as I react to positive or negative news and hopefully take opportunities whilst at the same time actively managing risk. This means that with the Tinker, £13.1k less dealing charges and stamp duty, will be invested in the 10 stocks I run with for the next 12 months and with the ASH, £12.9k per stock again less dealing charges and stamp duty. The 3YL will of course just be left alone to hopefully carry on it’s good “sleeping” work.
The 10 stocks that compose the revised ASH & Tinker will be discussed in a blog introducing year two in a few days time. As before the stocks involved have come through my own rigorous but not always right, screening processes based on good returns of capital employed, attractive free cash flow, what I perceive to be reasonable growth prospects/prosperity (this may not always agree with the widely held opinion of Mr Market) and hopefully not too much exposure to unnecessary risk.
As ever, anything produced here should not be taken as investment advice but rather a sharing of the whittling methods of a fellow investor trying to openly and honestly communicate the quest for reasonable returns from the stock market.
Once again the rules of the exercise are reproduced below.
Reminder Of The exercise Rules.
The three portfolios will be firstly a buy and hold for three years, ploughing on regardless through economic conditions, profit warning and any other news either good or bad. I will call this the three-year life portfolio (3YL). The only time a change to the portfolio will be permitted is if a business is de-listed for any reason: the funds liberated would then be discretionally invested between the remaining stocks in the portfolio.
The second portfolio will start out with exactly the same holdings as the 3YL but each January the same cash flow screens/returns on assets screen will be run and a revised set of ten stocks nominated. This revised set of stocks will have the proceeds of the sale of the previous years stocks equally divided between them i.e after one year we have £110k of funds then a purchase of £11k will be made for each of the ten stocks. I will call this the annual sit on your hands portfolio (ASH).
The third portfolio will again start the same as the 3YL & ASH portfolios but I will alter the percentage invested in each position within the portfolio in reaction to RNS announcements from the companies, economic conditions or any other reason that seem valid for altering, reducing or increasing a position. I will call this portfolio the managed annual tinker portfolio or simply the TINKER. All 10 stocks will remain within the portfolio throughout the year although the investment in each stock may vary. For example, one stock, let’s say Hattersville Dream Co. may issue a particularly bullish RNS “results will be appreciably ahead of market expectations”. The Tinker may sell down one or more of the other holdings to invest more in Hattersville but still retain a position, although not equal positions, in the same 10 stocks that we started within January each year. In January 2017, 2018 & 2019 this portfolio would be treated in the exact same way as the ASH and funds equally balanced across the each of the ten stocks starting that year.
The common rules for all three portfolios:
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