Investing in shares is not a love affair and to my mind, an investor has to evaluate not only when to make the purchase having completed your thorough research but also without emotion decide when it is time to leave. With some shares, this holding time can be very lengthy e.g. Somero, Bioventix, Dart Group which met my buy criteria in 2013,14 and continue to look attractive investments.
As I have mentioned in previous blogs my approach is to create a mini-universe of shares that qualify for consideration by virtue of attractive metrics such as free cash flow, returns on capital (CROIC and ROCE), increasing turnover, increasing profits etc. I should say that I also spend a fair amount of time pondering over what could go wrong with a business before I feel comfortable to make an investment. I don’t invest in anything that could be described as a blue sky stock: each company I invest in has to be a proven profitable business with real and not imaginary profits.
As ever, I find myself building into winning positions as confidence in them gains: not the easiest of things for an investor to do “why should I pay £2.31 for something I paid £1.97 for a couple of months ago?
My investments are for the bulk part held within a tax-free environment and I have been utilising PEPs and subsequently ISAs going back into the mid-1990’s.
One thing I am certain about with investing, well at least with my outlook on life, is that in the early days of one’s investment journey you make many mistakes and you also have the odd wonderful year. In my experience the rates of return on small value portfolios, say under £100k, where you may have a greater appetite for risk as the potential loss is possibly not life changing in monetary terms, decreases markedly as your pot of dosh increases. The bigger the pot, the more risk averse one becomes.
In terms of overall returns, your volatility tends to even out as you become comfortable with your investment approach, nurture the winners and ruthlessly jettison the stocks that don’t move in the desired direction. In general terms, once I “found myself” as an investor, I estimate that over a period of many years averaging out the good and bad years should with discipline yield in the range of 12-16% PA. Investment returns are not governed by magic tricks, they are dictated by a combination of individual company performance and the overall health of the market: fortunately the markets in 2016/17 were in pretty good health.
In terms of performance measurement, I tend to go against the flow whereas most investors assess on a calendar year, I measure performance on a tax year. It seems sensible to me as that coincides with topping up the ISA pot and balancing CGT.
The year 2016/17 was an unusual year with the FTSE all share total return taking a significant tumble at the end of June after the unexpected Brexit referendum result. We also had the unexpected result of the USA presidential election where a man who would need an annual review due to his age to retain employment in the UK took the most powerful job on the planet. Both results were unexpected and certainly not predicted by the well-paid commentators; who needs experts!
So, onto the overall performance of the Whittler portfolio for the financial year 2016/17; the performance against my usual comparators are given below:
Stock Whittler portfolio: +28.4%
FTSE All Share TR: +23.8%
Fundsmith Equity T Ac +24.4%
Marlborough Spc Sit: +22.0%
Henderson Sm Co’s IT +19.1%
Overall the year 2016/17 was a good year to be investing even if on the end of June, post-referendum, it did not look that way. However, one can be easily misled into thinking that 2016/17 was a vintage year overall as it was Oil & Gas, Commodities, Miners & Banks that did all of the really hard work; these sectors between then averaged a gain of 77%. If you strip those sectors out then the gain for the FTSE all share fell to a more modest 13.6%. Now I rarely invest in any holes in the ground and after the financial crisis, I won’t touch banks with a bargepole so overall I am very happy indeed with a return of just over 28% from what I call proper companies that don’t live in the more speculative sectors.
Now although I am delighted with that performance, I am ever mindful that the markets will at some time take a dip and at some time we will enter a bear market. I am also very mindful that the next profits warning for a stock within my portfolio may be just around the corner. The fact is that these events happen and the important thing is how you react to them.
Note as I write the example portfolio I blog about the Tinker which is roughly my best 10 ideas taken as a modest initial investment of £100k is up 39.0% for the financial year 2016/17. Incidentally I will write up the 5th quarter’s performance at the end of April. I actually wonder if one day I will be brave enough to eventually just run with by best ideas in a concentrated portfolio of 10 stocks rather than the roughly 30 that I perpetually run with; I am sure that would be an even more productive way forward.
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.