These days we have a vast number of investors for whom the stock market plays a fairly major part in their daily life. Some will be active part-time investors who fit their investment activities around paid employment and others may well be “living the dream” and be loosely classified as a full-time investor.
Strange thing is, how do you identify or characterise a full-time investor? Is it somebody who sits at a screen all day watching every move of the market and trading frequently or is the Terry Smith type sitting on one's hands and doing very little to a quality portfolio. Well in truth, both extremes are really full-time investors just simply different styles. When I look at my style of investing it identifies much more closely with the Terry Smith style than the active trader style wanting to make a fast buck and exit the position before moving onto the next trade.
With style in mind, the style of my investing rather than by usual laid-back attire of the summer months, sandals & shorts, I thought I would write a few notes of the typical day in the life of a whittling investor:
Well getting up and out of bed in the morning has always been easy for me. The only period in my life where I have struggled with this was in my early 20’s when I suffered “Sunday migraines” but later found that was beer related. I usually get up at about 6am and find myself in front of the screen by around 6:30 then go through my diary of planned RNS announcements expected that day and also every few days, do a quick run to see if any new opportunities have been identified in my investment universe (see blog dated 24th April 2016).
Then with a nice cup of coffee at hand, as 7:00am arrives, I open up Investigate to scan the days RNS’s of interest to me. I have a preset list of “my list” within Investigate that should if all goes well, immediately flag up any RNS for a company that I have shares in. Then, of course, we could spend some time sifting through every word in an RNS or as I do, use word & phrase highlighting tools.
The first highlighter I used a few years back was the one on ADVFN. This works fine but you are limited to 20 phrase boxes, see below:
The next one I moved onto was within Firefox using their phrase highlighter add-on. You have to remember to switch it on and off otherwise, it will highlight those nominated words and phrases from any web-site you visit and that can be a bit of a pain.
Finally, I settled for one that works on both Chrome and my preferred browser, Opera. The one that really does the trick for me is Pearls extension and the really clever thing is that it is web-site specific. I have mine set just for Investigate:
An actual Pearls example for a Norcros trading update from July 2016 is given below:
Using these highlighter tools enables me to quickly rattle through any RNS of interest and take a preliminary view of what action I may take for example if I see a profits warning I almost invariably sell at market open but this can be a pain as it delays my daily swim. Oh yes, I then send out a few tweets and where appropriate declare whatever interest I hold in the company. So assuming there is nothing overly worrying identified, I am off to the pool for a quick mile returning for a plate of porridge and blueberries at about 9:15; I did read that blueberries are supposed to stimulate the brain, so why not.
Then over breakfast it’s a question of pondering over what Mr Market makes of things and finishing the working day by about 10am; I quite like this lifestyle. Occasionally the day will drift on a little longer if any stocks are identified from the screens that I run on SharePad. Then the process of more in-depth research starts.
Just one more check and that’s at the end of the day when I check to see how things closed off on Sharescope. Personally, it’s a lifestyle that fits well with my personality and I only wish I had made the move away from paid employment many years ago but the opportunity was not always there.
Let’s see what tomorrow brings!
In April this year I wrote an article entitled Creating an Investment Universe. The purpose of the article was to describe my approach to screening the entire LSE universe of over 2000+ shares to come up with my own very limited investment universe based on strict financial criteria. That massively slimmed down universe, then forms a list of apparently financially strong stocks for further in-depth research. Of that 2000+ shares approximately half are located on the very hostile planet called AIM, a very inhospitable place with large areas reminiscent of the USA wild west with bandits, rustlers, snake oil merchants, Klondike prospectors, savages and medicine men. All in all, a difficult place for the settler venturing onto planet AIM to stake a claim and make a sustainable, risk-averse investment in his or her future.
Certainly, my approach to AIM during the period from its inception in 1995 to 2010 was simply to simply exclude AIM stocks from any screen; apart from the odd punt, I just would not consider making a serious investment in an AIM stock. My reasoning for excluding AIM was a combination of its lightly regulated market conditions, the spiv “Private Walker” type CEO’s, the abundance of “jam tomorrow” companies, the disappearing businesses and the exclusion until 2013 of AIM stocks from ISAs. From the planet AIM, there has always been the stories of the rapid 10 bagger, the resource prospectors that struck it rich mixed with a liberal sprinkling of tales of companies that are little short of fraudulent vehicles designed to make their directors very wealthy at the
I should say that within my non-ISA stocks I have had for years a sprinkling of non-AIM stocks mainly based on fairly careful selection but over the last five years, my number of AIM investments has rapidly increased to form around 50% of my ISA portfolio and 50% of my non-ISA portfolio. One of the reasons for this shift in percentage has of course been due to the eligibility of AIM stocks to be held within an ISA as from 2013. However, personally, that was very much a secondary consideration. The main reason for my increased numbers of AIM stocks was the realisation that in amongst that hostile planet AIM there existed some truly wonderful companies that are managed on a very sound financial basis. My approach is simply to screen the entire AIM community to come up with a tiny handful of stocks that meet my strict financial criteria that I apply to any stock listed on the main market. You know, sometimes I feel that investors who are reasonably successful on the main market and then take on AIM, are similar to successful businessmen who decide to become directors of football clubs. Once the successful businessman becomes that football club director, the usual common sense that has proved so sound in his business world is left behind and financial problems are not far behind. The fact is that any rules or investment philosophy that you apply on the main market must be applied “with bells on” to the AIM market and that is exactly what I try to do. I am not saying for a moment I have the perfect answer, I am sure I will get hit with the occasional profits warning, I know for near certainty that I won’t get the elusive “10 baggers” but that’s totally fine with me.
So over the past five years how have these hopefully less risky stocks performed that I have plundered from the inhospitable planet AIM? Well an analysis year by year and it’s really only a handful in fact 17 stocks from the hostile planet AIM’s population of 1000+ is given after the following notes:
2012: no new stocks identified; just two identified and these are ones also identified in 2011/12, DTG and NICL that as a basket of only two gave an annual average performance of 56.6%pa compared to the AIM all share average over the same period of 2.8%pa over the four-year period.
2013: three new stocks identified along with three stocks identified from previous years. The average annual return of this basket of six stocks was 19.5%pa compared to the AIM all share of 0.7% pa.
2014: Only one new stock identified and two previously identified stocks again confirmed as currently meeting my return on capital/cash flow criteria. The average annual performance over each of the following two years for this basket was 12.2%pa compared to the AIM all share at 1.8%pa.
2015: Three new stocks identified and a basket performance of 14.3%pa over the year compared to the AIM all share of 4.6%pa.
Over this period the strict financial screening of the inhabitants of planet AIM has worked very well for me and I have taken positions over the years in nine of the seventeen stocks identified for further consideration. I still hold legacy positions in all of the companies identified and also positions in companies identified over recent months.
The AIM stocks that I currently hold that have been identified by my return on capital/cash flow screen are DTG, TEF, AMO, NFC, CCT, IGR, SOM, ZYT & ABDP (sadly a late addition, should have bought earlier!).
One of the stocks TEF is currently going through some post-Brexit London property turbulence but I am confident enough to continue to hold.
I certainly can’t predict what the future will hold; will TEF be loved again soon, will ZYT’s unpredictable order book lead to a profits warning, I simply don’t know. What I do know is that by taking considerable care with AIM stocks I can greatly increase my chances of enjoying sustainable returns from a basket of stocks from the dangerous planet AIM.
I should also say that I do also purchase other shares on AIM that don’t strictly align with my return on capital/cashflow criteria but these themselves such as Bioventix, Tristel, Cambria will qualify for a purchase due to other criteria but good cash flow will always be a requirement.
We have now reached the first full half year of the Passive v Reactive Whittler portfolios so it’s time for a quick review to see how my meddling ;has done compared to Mr Cool who simply sits on his hands and lets time do the work. I have again restated the basic rules for the management of the portfolios; see the last section of this article. All of 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 real life share purchases. At the time of this six month update, I hold positions in four of the ten companies: SOM, CCT, NFC & PSN. I also held Hikma as a spread bet so that’s a financial interest in 50% of the stocks within this exercise.
Update & Trading in Half Year (Feb to July 2016):
Of course following the rules of the exercise no trading took place in the 3YL (three year life portfolio) or the ASH (annual sit on hands) portfolios. Trading did take place in the Tinker portfolio and these are listed below:
1/2/2016: sale of 60% of position in Bodycote following a broker downgrade and the funds used to purchase further shares in Dignity.
1/3/2016: sale of 50% of position in Amino Technologies & the reinvesting of the proceeds in Somero following excellent preliminary results.
As you can see there has been no additional alteration to the Tinker portfolio since the first quarters reported performance. My intention is to not just trade for the sake of it but to only trade as I would within my real-life portfolio.
How are the three Portfolios doing? Well as 3YL & ASH are identical composition and allocation in the first year, they are identical with the original £100k now reaching £114.7k, a 14.7% increase in the first 6 months of the exercise. The Tinker with its two trades sits at £113.8k an increase of 13.8%. The comparator for “how are we doing” is the FTSE ASTR (ASX.TR) which rose by 14.6% in a generally volatile February to July period that included the once in a lifetime Brexit event and the following market turbulence.
Overall, all of the three portfolios are performing well enough at this early stage: the five best performing stocks over the first half year of investment were:-
Hikma Pharmaceuticals, Next Fifteen Communications, Amino Technologies, Somero Enterprises and Dignity
The full performance of the 10 stocks is listed in the table below
Only two of the stocks so far are showing a loss as both Character Group (-5.1%) and house builder Persimmon (-9.65) took Brexit hits from which they are still hopefully recovering. Persimmon was particularly hard hit following the referendum and at one time was down by over 40%. Personally I took advantage of the Persimmon opportunity and added to my real life portfolio once the stock had started to recover.
Six Month Verdict
In conclusion at the six month stage all portfolios are performing very well with the passive marginally ahead of the Tinker but such are the weekly movements, this is not really significant at this early stage. It will be interesting to see how the gap(s) show themselves as time moves on over the three years of the exercise.
As an aside, I normally set a trailing stop loss on my stocks but never an automated one. Had I set an automated one i.e. one that reacts to any movement regardless of stock specific or general market turbulence effecting all stocks, the performance would have looked appreciably less favourable. With stop losses I set an initial 15-20% to allow the stock to breath and then as it hopefully appreciated in price convert to a trailing stop loss of 12-15% but NOT automated with my broker, the trailing stop losses are treated as advisory events that force me to take a reasoned decision. The original 15-20% stop loss set at the time of purchase are often acted upon in practice as a coldly admit I may have not got a particular trade right.
Rule No1 limit your losses; rule No2 is simply remembering rule No1 and live by it.
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:
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.