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.
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.
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