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
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We have now reached the end of the fifth quarter of the Passive v Reactive Whittler portfolios so how are things going? The Tinker and ASH (annual sit on hands) had 8 stocks sold at the year-end review; see earlier blog of January 2017, to be replaced with 8 stocks identified from my investment universe. For clarity & to declare ownership: since the start of this Tinker series back in January 2016, a total of 18 stocks have been involved across the 3YL (leave it alone and don’t do anything for 3 years apart from reinvesting dividends), ASH & Tinker. All of these 18 stocks form or have formed part of my “best 10” portfolio and I still hold the majority of these 18 stocks and they form the backbone of my portfolio. The quarterly performance and dealing history, warts and all, is openly & honestly published within this Stockwhittler site. By way of a reminder, the ten original stocks common to the three portfolios and the eight replacement stocks identified in January 2017, come 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. This universe shrinks the 2000 or so LSE shares down to about 40-50 for further really detailed appraisal: interim & final reports, all RNS news and particularly outlook statements. Within the rebalanced Tinker once the eight new stocks had been added following the sale of eight original stocks on 23/24-January 2017: In the Tinker and ASH out went Adept Telecom, Bodycote, Character Group, Dignity, Elementis, Hikma, Next Fifteen Communications & Persimmon. They were replaced with: Air Partner, Bioventix, D4t4, Galliford Try, ITV, Telford Homes, WH Smith & Zytronic. In Tinker portfolio terms I say out and replaced however, in terms of my actual investments, I continue to hold and indeed top up the majority of the 18 stocks discussed in this series to date. As mentioned previously in this series I am a great believer in the security of investing in a basket of stocks. Within that basket, you may well have a few outstanding stocks whose overall impact on the portfolio performance is somewhat diluted by other less well-performing stocks but conversely, a basket approach reduces risk when a couple of stocks are not heading in the desired direction. Now, of course, the rules I apply to this Whittler/Tinker exercise limit the ownership to my 10 best ideas as identified in January of a particular year and only in the Tinker can I manipulate the % on any of the 10 stocks in that portfolio in a 12 months period. Turning to the general concept of one’s entire portfolio i.e. stepping out of this 10 stock scenario for a moment is that many investors struggle with is the size of that basket and I usually run with a basket of around 30 stocks. You could argue that 30 stocks are a touch high and difficult to manage but personally using the systems that I operate, it’s a doddle. Yet I do feel that my overall performance which I must say I am generally happy with, could up a notch or two if I had the conviction to simply invest in my best 20 or even 10 ideas rather than the 30ish I usually manage. Having said that, I do ruthlessly and without emotion weed out stocks where it seems I did not get it right i.e. ones where the fundamentals for example or the story/original reason to buy no longer appears to be sound. Anyway, enough of this waffling on about the number of stocks within one’s portfolio, let’s see how the three ways of managing a portfolio discussed in this series, Tinker, ASH, 3YL, have performed by quarter 5 that’s 15 months since inception I have also included tables from the excellent SharePad showing Tinker and 3YL: I reckon I must be one of Sharescope’s original customers many years ago and now am also hugely appreciative of the SharePad version The performance of the 18 stocks across the Tinker, ASH & 3YL has been really very good since this series started with 10 stocks at £10,000 each back in January 2016. The Tinker is slightly ahead at 53.5% gain over this five quarter or 15 month period but really there is nothing significant to mark one portfolio out from another as the performance of all three strategies has been really very good. Thankfully the shares discussed here have been the backbone of the total portfolio I run and as such have contributed handsomely to my annual performance and I confess to being a happy investor.
Maybe we will see a more significant difference in performance within the three portfolios within the coming months but to my mind, all performance has been extremely good and too close to draw any significant conclusion as to portfolio management approach other than to again see that quality counts in investments. The comparisons with the returns that would have been made had we invested in the FTSE all share total return, FTSE ASX.TR are given in the tables SharePad below and as you can see the FTSE ASX.TR has been very significantly left behind by Tinker, ASH & 3YL but who knows what the future mat bring? After all the next profits “Oh no it’s a profits warning” or delightful “exceed market expectations” RNS may just be around the corner. Trading within the Tinker since 21/01/17 i.e. since rebalancing in January this year: well only one trade has taken place and that was on 3rd march 2017 when ½ of the WH Smith holding was sold and reinvested in that lovely high-quality stock Somero: I have to confess that I have held an appreciable quantity of SOM in my ISA since 2013. Not falling in love with a particular stock, but an appreciation of quality and backing a winner. 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. 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 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: • Start January 2016 with the same 10 stocks each having £10k invested. • The basis of stock selection will be common to all purchases and in line with my usual investment principals based on strong cash flow, good returns on capital and sound financial health. • Dividends will be reinvested. • All three portfolios will be continuously fully invested in the relevant 10 shares. • The 3YL will not have any actions taken apart from dividend reinvestment and be left alone to prosper or otherwise over the three year period. • The ASH & Tinker will commence each January as fully invested in 10 stocks. However, the Tinker will have the discretion to rebalance the allocation of funds to one or more of the 10 stocks in the portfolio. • Transaction charges will be £5 per transaction with stamp duty deducted as relevant. • Dealing are now applied to the reinvestment of dividends as per iWEB costs. 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:
A brief update on my dealings within the Tinker portfolio; the last quarterly update was given on 1st November 2016. Firstly a few points regarding the portfolio exercise:
I hold or have held during the period of this folio 80% of the stocks discussed. When I first but a stock I usually allocate at least a 15% stop loss, could be as much as 20% for a small market cap: I like to give the stock time to breathe as it were. As the stock appreciated in value, I move to a trailing stop loss which is somewhat tighter at 10-12%. Four Trades On 15th December 2016: A rather successful stock, Next Fifteen Communications, had risen nicely but over the last couple of weeks had started to drift back and breached the 12% trailing stop loss. This prompted me to sell just over 75% of the holding for a 36% profit and releasing £12000 to be reinvested in other constituents of the Tinker portfolio. The reinvestments of £4000 per stock, less fees, were made into each of the following stocks currently held within the portfolio:
Current Tinker Portfolio Performance: Since the start of the Tinker portfolio on 25th January 2016, it has increased in value from £100,000 to £123,500 i.e an increase of 23.5% compared to the FTSE All Share Total Return (ASX.TR) of 19.0%: who back in January or indeed I after Brexit would have thought that the FTSE ASX.TR would have performed so well? Decreasing or Increasing Positions: I really only sell when I see a pre-planned reason to do so as I totally ignore market noise. At least that’s what I tell myself! Remembering that the portfolio exercise rules are that no new stocks may be introduced during a 12 month period starting 27/1/16, the pre-planned strategy for selling is:
The strategy for adding to positions within the portfolio is simply based on really encouraging news released by the company. That could be “profits materially ahead of market expectations” or something happening with the business that is claimed to be transformational. The next planned update of the portfolio in at the end of January 2017 and for the revisions, I am currently working through my usual cash flow/returns on capital screens. Happy investing. 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. Happy Investing! 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:
It’s time for the first quarterly update on the Passive v Reactive Whittler portfolios; I have again restated the basic rules for the management of the portfolios; see about 5 paragraphs down. All ten stocks common to the three portfolios were identified via my routine free cash flow+ returns on capital screen. At the time of this update I hold positions in three of the ten companies: SOM, CCT & NFC.
Update & Trading in Quarter (Feb, March, April): 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. On reflection the sale of 60% of the Bodycote shares was a slightly poor move that came about due to my listening to the market noise: yes I do whilttle on about not listening to market noise but somehow I did. 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 £109.9K, a 9.9% increase in the first 3 months of the exercise. Strangely the Tinker with its two trades also sits at £109.9k an increase of 9.9%. The comparator the FTSE ASTR (ASX.TR) rose by 7.3% in a generally happy February to April for the indices. The three best performing stocks were the smaller market capitalisation: NFC, ADT & SOM. The best performing large cap stock was BOY; the one where I listened to the noise and sold 60% on the holding in the actively traded Tinker portfolio. 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:
Forward Note: The following monologue concerns the investing of a notional £100k in a portfolio of stocks that pass through one of my free-cash flow/return on capital screens: three approaches to the management of the portfolio are detailed. An obvious question is “would I be investing a further £100k in the markets as they stand in January 2016”? The answer is a definite no, not at the moment and in fact I have been taking profit in many of my positions in the last month to manage risk in the uncertain market of January 2016. At the time of writing I stand at 65% cash in my portfolio. Therefore please consider the following notes as an exercise in managing a portfolio rather than “this is what I am going to do today to invest and make a return”. For a while now I have been fascinated by the discussion of the merits or lack of merits associated with continually trading within a portfolio. Some respected and famous investors feel that once quality companies have been identified the preferred approach is to sit on ones hands and let the quality business simply grow with time; in effect leaving things alone trading wise. This, of course, goes somewhat against our nature as investors as we always seem to be looking to tinker and “make things better”. Personally, I am not one for over tinkering and usually hold my stock purchases for around one to three years, reinvest the dividends and add to profitable positions. However, I thought it would be informative to apply my typical whittling methodology to a group of ten stocks and from these ten stocks form three portfolios that will be initially the same at day 1 but change over the period of monitoring which will be three years. 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:
The ten stocks I have selected and invested a notional £10k into each one at the start of business on Monday 25th January 2016 are: Adept Telecom: Mkt Cap £54m Amino Tech: Mkt Cap £81m Bodycote: Mkt Cap £1032m Character Group: Mkt Cap £107m Dignity: Mkt Cap £1115m Elementis: Mkt Cap £974m Hikma Pharma: Mkt Cap £3979m Next Fifteen Communications: Mkt Cap £160m Persimmon: Mkt Cap £5972m Somero Enterprises: Mkt Cap £77m The stocks are shown in the above ShareScope portfolio invested: invested at market open on Monday 25th January 2016; the prices above are end of day prices. The stocks give a reasonable diversification across sectors. I have deliberately made a decision to exclude any stocks below £50m market cap and also deliberately selected half of the stocks to either FTSE 100 for FTSE 250 companies. I will keep the blog up to date with variations in the Tinker portfolio as allocation changes are made and the specific reasons for that change in allocation. I will also issue quarterly progress notes for all of the portfolios. At the time of writing I hold positions in two of the ten companies: Character & Somero. After three years I wonder which portfolio will come out on top? |
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