I thought I would have a bit of a change to the usual format of the Tinker update and start with some, dare I call it wisdom that I have grafted into my way of investing over the years. The approach I describe below, listed in points 1 to 4, gives a decent thumbnail description of my approach to investment and managing my portfolio and as you will see, this approach has served me well in the application of the Tinker. Just for clarity, I should say that my overall investments have three groupings. The dominant grouping is based on companies offering very good return on capital invested, good cash flow and delivering real profits i.e. the type of business that this passive/reactive series has involved. The second category are what I term as special situations examples recently have been Lavendon, Waterman, KWS, ULS, OTB, JE. and IQE. Then we have the truly boring Hi-Yield portfolio that does what it says on the tin but yields far more than a bank or BS account but of course comes with a slight degree of risk. Anyway, onto the return of capital, free cash flow world of the Tinker:
For want of a better description, let’s call it Tinker management guidelines No’s 1 to 4 (no reference to the highly respected football Tinkerman of Leicester City FC, Claudio Ranieri).
Health Warning: non of my writings should be seen as me giving advice on individual investments or indeed which shares to buy or sell: I don’t do that! It is simply my sharing of my way of thinking in how I go about making investment decisions.
Number 1: Buy Quality
For me, it’s about buying quality companies that actually make real profits with decent returns on capital, have good cash flow and are fairly valued at the time; we all try not to overpay but sometimes you just have to stump up the money for real quality. Also and very importantly, satisfy yourself that the companies don’t manipulate the accounts to create illusionary profits.
Number 2: Feed The Positive Momentum
If and when your quality companies prosper then don’t be afraid to reinvest further capital or reallocate capital from those performing less well and buy more of the quality stock showing positive momentum.
Examples from the Tinker during it’s lifetime to date are buying further Somero, Zytronic & Bioventix yet being sensible and top-slicing when the market had possibly overheated the prices of these stocks.
Number 3: The Importance of Dividends
Dividends are important and should not simply reside as cash in the foot of the portfolio, they should be reinvested and made to work.
Number 4: Profits Warnings and Bad News
The number of stocks currently held between all three portfolios, 3YL, ASH & Tinker is 18 stocks. The stocks were the identical 10 for the first year and then following the rules, reallocation of funds made to a maximum of 10 stocks at the end of the first year for the ASH & Tinker with the 3YL retaining simply the original 10 stocks selected back in January 2016.
I should declare that out of the 18 stocks involved I have held all 18 at least for some fairly lengthy period over the 21 months to date and currently have 15 still within my portfolio. Indeed 8 of my 10 largest holdings are from this retained list of 15 stocks. Why only 8 in the top 10 largest holdings? That’s simply down to the success of KWS and XPP pushing a couple down outside of the top 10 of my main portfolio (Note: I also run a High Yield portfolio and at sometime may include a note or two on that within the Blog). For the sake of ease and confidentiality, I have based the performance on an initial allocation of £10,000 in each of the original stocks when first purchased in January 2016. The management of the Tinker closely mirrors my approach to managing my investments with investments, sales, top-slicing and topping up matched in my long-term portfolio.
Note: as a brief reminder of the Passive/Reactive rules can be found at the base of this article in the appendix.
How have the three portfolios performed in the last three months and particularly since inception? The performance is given in the table below:
The Tinker Performance:
3YL (retain the same 10 stocks for the full 3 year period) Performance
The Tinker Dealing In 7th Quarter
At the end of July I decided it was time to feed a little more to the stocks showing exceptional positive momentum when compared to other stocks in the portfolio.
Some stocks became what I felt to be a little overheated or in ITV’s case lacked momentum in July and I sliced a few ITV, Somero & Telford reinvesting the proceeds in the highly positive momentum of Bioventix, WH Smith’s and Zytronic. These stocks performed very well over the next three months and in turn two of them, Bioventix and Zytronic were themselves top sliced in mid-October following results and a TU that were ok but the market had become overly thirsty for “greater than expectations” and in the realistically that sort of statement cannot appear in every RNS. The money released in mid-October was then reinvested in Amino Technologies and the previously sliced Telford and ITV. In the case of ITV, the arrival in January 2018 of the highly capable Carolyn McCall dropped in from EasyJet will, in my opinion, get some positive momentum under the share. Oh dear, I see that Woodford has been buying as well: why do I see images in my mind of Woodford and myself in BBC’s Apprentice shoot-out sitting in the grim greasy spoon Cafe prior to one us being fired by a ferret in a suit for making a potentially bad decision in buying ITV?
Poor old Woodford, his previously great track record has been a touch tarnished recently but that happens, it’s would be wise for all private investors to remember that. In fact staying on that very theme, I have mentioned before that many PI’s are currently making very tasty percentage returns over the last 12-18 months; it’s not uncommon to see Tweets declaring 30%, 40% or even 50%. However, we have been in a very sweet period for stocks and as I have reminded readers before, these are simply not the type of returns one can expect forever. I would say that an investor who over a significant period, let’s say 10 years, can average something along the lines of 12-16% will be a relatively wealthy investor especially if they top up each year on their ISA allowance; to my mind, it’s all about being sensible, managing that portfolio, applying risk management and very importantly remembering that get rich quick is a dream not a reality when investing on the stock markets.
The 3YL (simply invest in apparently good companies and leave them to it) has performed well giving a 48% return over the 21 months. Reappraising the ASH back in January 2017, boosted the return up to just under 60% and the more dynamic approach of the Tinker which has the same 10 stocks as the ASH, showing at the end of 21 months a gain of 71.6%. We also have some fairly hefty dividends that will land in the next three weeks; I do like dividends. I am of course very happy with this performance but as I said in the text above, the markets have been in a very sweet spot for a couple of years now and I would imagine that almost all investors with the exception of bulletin board sheep would have prospered in this time.
The next update will be at the completion of the second year which will be in the third week of January 2018. At that time I will either decide to conclude the series as I believe the points about wise portfolio management have been, at least to my mind, well demonstrated with an open dynamic journal of activities or rebalance and take it into the third year.
Whilst investment style may be a very different thing between individual private investors, I hope you have found a smidgen of enjoyment within this series and as ever, I wish you happy investing.
Appendix: The boring stuff!
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 xyz 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 xyz company 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.