NOTE: A new section has been added to the Whittler: Voyager RNS Log where I take a weekly or thereabouts, review of any RNS stories that are relevant to shares that I either hold or are of close interest: see page in the header menu.
We are now halfway through the 3 year reactive/passive portfolio exercise: for the rules and structure then it’s worth referring back to the previous quarterly reports on performance: use the categories link on the right hand side of the page; passive/reactive folio.
Just as a very brief refresher; the original 10 stocks of the Tinker and ASH (annual sit on hands) were reviewed and rebalanced in late January 2017 and had and had 8 of the original 10 stocks replaced. Following the rules, the 3YL (leave it alone and don’t do anything for 3 years apart from reinvesting dividends) was left intact with no rebalancing taking place. So the 10 stock portfolios have between them contained a total of 18 stocks selected from those stocks that formed my universe from which I normally consider purchases. That universe is considerably under 3% of the 2000+ combined fully listed & AIM stocks available for consideration. All all of the 18 stocks mentioned here are either still currently within my portfolio or have been at some time since the exercise began. The portfolio exercise described here started on the 22nd January 2016 with £100,000 invested in equal blocks of £10,000 between ADT, AMO, BOY, CCT, DTY, ELM, HIK, NFC, PSN & SOM. The January 2017 rebalancing/reappraisal of the Tinker & ASH introduced AIR, BVXP, D4t4, GFRD, ITV, TEF, SMWH & ZYT: all stocks that I had been holding for some time in my various accounts and all selected by my usual universe criteria on the basis of FCF, ROCE & CROCI.
As mentioned previously in this series I am a great believer in the security of investing in a basket of stocks, in fact, I recently published an article on the subject of a basket of stocks “Guess I Am A Basket Case”.
So, how are the various approaches performing at this stage as measured against each other and the fairly soft benchmark* of the FTSE All Share Total Return. The table below gives the performance data “warts and all” :-
* Note: I am shortly publishing an article on what I consider to be the very important subject of benchmarking your portfolio’s performance.
At the 18 month, 6th quarter stage, it’s quite amazing to see that there is nothing really significant in the performance of the three portfolios and they have all performed very well within fairly kind, although at some times choppy, overall market conditions. I suppose a couple of the reasons why the performances are so close are:
1. If you select quality companies that are already making decent profits, producing good cash flow and making a decent return on capital(ROCE, CROCI both over periods of time), then in my opinion you generally enhance your chances of success.
2. I am possibly not the best type of character to run the Tinker as I don’t listen to market noise or really make knee jerk decisions. In fact, I have only made a handful of reallocations (trades) within the Tinker in the 18 months it has been running; I simply tend to be a fairly laid back/patient investor.
What I would say is that in my actual portfolio rather than the 3YL, HIK would no longer be in the portfolio as it would have been sold or at the very least a serious evaluation of whether to keep, sell or reduce taken when the trailing stop loss, at the time in profit, was breached. HIK would certainly have been jettisoned on the profits warning of 3rd August 2016. Selling on the day of that relatively average profits warning would have still retained a profit on the original purchase of 15% rather than the loss of -28% that detracts from the performance of the 3YL. Incidentally a couple of years back I did a blog article on my actions with profit warnings and since that time Stockopedia have also produced an excellent article on profit warnings; worth a read.
In summary I am happy with the performance of the stocks discussed in this series and indeed many of them form the top 10 or 20 holdings from my current portfolio holding of about 30 stocks.
Just by way of a slightly different tack to this quarter's update, at some time I will include within the Stockwhittler site either an article or more probably a section on my investment disciplines that I apply to myself. Until I get that from draft to finished, although I guess such a thing will never really be finished, a couple of tasters but remember this is not advice but rather me sharing my approach to investing:
1) Use a trailing stop loss at all times. Now, by that, I don't mean an automated stop loss set on the broker's software that automatically sells when you bridge say a 12% trailing stop loss. No, what I mean is a real "wake up moment" where you totally and UNEMOTIONALLY evaluate that holding: ask yourself based on the current information at hand, would you a) genuinely buy that stock today if you did not already hold a position i.e. make a totally new addition to the portfolio & b) just for a moment, forget about what apparent attractions the stock may have and seriously and I do mean seriously, evaluate the potential of any further downside within that investment. c) if after a & b you are not totally UNEMOTIONALLY convinced, then simply sell; you will probably feel better for it, after all, you can always reinvest but with an uncluttered mind and so remember so importantly, I have preserved capital.
2) Almost invariably sell as soon after the market opening as possible on a profits warning. A PW almost certainly means several months of gradual decline in the share price until the management actions kick in and Mr Market begrudgingly starts to forgive the business. Again, it’s about preserving your capital.
3) Whatever investment software you may possibly decide to use DO take the time to become so totally familiar with what the system has to offer. Just that simple learning process will in my experience be a very worthy investment of your time.
4) Do not listen to market noise and in there I include the stuff that is churned out daily by journalists, brokers or the media in general: simply stay unemotionally focused.
Well, that’s it for this quarter’s update. The markets have been in our favour and sensible investing has paid a handsome financial return. However, who knows firstly what the general market conditions will be in the next 12 months? Indeed, in my usual sober way, remember that no matter what basket of great stocks you hold, the next profits warning could be just around the corner: all part of the varied tapestry of investing!
As ever, Happy Investing
I suppose that you could feel rather hurt if a friend or colleague described you as a basket case but in the world of investing, that’s what I am. So why am I a basket case? Well that's easy to explain really in that I seek the comfort of a collective of stocks within my portfolio rather than simply relying on one or two stocks; it’s all about that simple old concept of managing risk. For me, investing needs to be something I do that will hopefully make me a positive return on my capital whilst being able to sleep soundly at night. I painfully recall the days back in the late 90’s when at times I ran a very concentrated of just a handful of stocks, at times about four or five, and experienced what an underperforming stock may do to both your concentrated portfolio and indeed, your serenity.
You could well ask why don’t I become the ultimate withdrawn basket case and just invest in managed funds which after all usually have upwards of 40/50 stocks and frequently more. Well, the sad truth is that an alarmingly high percentage of fund managers dismally underperform the market. Ok, there are some star managers out there but I would say that over time you would be better off investing in a low-cost tracker than a managed fund. Why are the fund's performances generally so poor? Well, a fair part of this is down to the manager’s fear of falling below the index for that particular style of fund; not only could the fund manager’s bonus be at risk but after a couple of years of underperforming indeed his continued employment which is often determined by how he performs against his peers. All a bit of a sad situation that results in that large percentage of fund managers, despite having a fairly substantial basket of shares, failing to do even achieve the performance of a simple tracker fund. However, as private investors, we have within our grasp quite incredible control of our investment universe. Firstly we can use whatever screening, research or other technique that selects that universe from which we decide to buy a stock from. Secondly, we decide how much of our “hard earned” we want to expose to that purchase: yes, with every purchase there is an element of risk but there are ways of mitigating that risk but risk in general terms calls for a future article dedicated to the subject. The risk we expose ourselves to is in my view especially great if that stock is the only holding within our portfolio.
Well, you may ask surely with that one share we can simply sell if things don't progress as desired and the price drifts slowly down. Well, yes we can in that scenario we can sell easily and move on but with every stock, I am always mindful that a profits warning could be just around the corner. Now a profits warning can hit the really big boys as well as the tiddlers; look at retailer Next & rail/road passenger operator Stagecoach both of whom dramatically dropped before the markets opened with a 7 am RNS profits warning, you simply don't have the opportunity to react before the initial mark down of the share price on bad news. Yes, you can sell rapidly on a profits warning as I invariably do and thus avoid the next few months of gradual decline but you just can't avoid that early pre 8 am hit; don't lose sleep over it but do ruthlessly manage it.
That risk can certainly be greatly reduced by holding more than one stock i.e spreading the risk: by holding two stocks, if one suffers a profits warning and the unfortunate stock falls by 20% in value, the damage is balanced over the portfolio and the bottom line suffers by only 10%. However let's say we own five stocks, then that hit on the value of the portfolio falls to a still uncomfortable but manageable 4% assuming equal weighting of the stocks. Doing the maths, the loss following a -20% drop on a profits warning falls to 2% with ten stocks and only 1.3% with fifteen stocks.
What has this taught me over the years is that I feel comfortable and certainly more secure in being a totally committed basket case with that basket of shares in my portfolio usually comprising around thirty stocks which I don't find anything of a challenge to manage given the wonderful IT available at the click of a switch; no idea how I managed back in the 90’s but to be fair I rarely exceeded eight or ten stocks in those days and at times as little as four or five; I remember the uneasy sleep pattern only too well.
Now being a basket case has other advantages of course as well as impact of profits warning mitigation:
Is it more expensive being a basket case? Well possibly it is marginally more expensive in terms of dealing charges but you can minimise that cost by using a £5 or so per transaction broker. The tax charge in terms of stamp duty is the same; here I am leaving to one side the differences between duty on the main market and AIM.
As you know, I don’t offer advice, I merely whitter on about my thoughts but if my relative Matt Tress, he was the subject of an earlier blog, were to ask me my opinion of the minimum number of shares he should accumulate, then I would say about 15 shares.
Why do I say 15 stocks? Well, The simple fact is that even the very best investors we read about simply don't get it right every time in terms of every share purchase becoming a winner. In fact, I was listening to a podcast recently when one of the very most universally respected investors said that around 6 out of 10 of his picks are not successes: as ever, it's the way you manage your portfolio that is crucial; ruthlessly jettisoning the stocks that the market does not smile upon. So if we have a basket of stocks rather than just the odd one or two, we can continually improve the performance of that basket by managing those under performers whilst building possibly larger positions for the appreciating stocks.
I use this culture constantly in my own portfolio ruthlessly without sentiment or regret, weeding out any underperformer before it can have a material effect on the portfolio. The strange thing is the way we are emotionally wired and the sense of relief one feels having had the courage to exit a losing position.
So in summary, my reasoning for being a committed basket case is:
Welcome to my Blog Page - I hope you find my whittling on to be of some interest. I am a private investor who is happy to share thoughts on the market and individual stocks. Please remember that I am definitely not offering tips or investment advice.