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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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. Archives
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