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Monday, 29 April 2019

Poor Investment Portfolio Performance.

It’s time to talk about my investment performance, something I’ve been putting off for too long.  It was always my intention, with this blog, to document a journey but, also, to have a means of sharing my thoughts and research with the world, with a view to generating good contacts and idea flow.  It would also be an educational tool where people who 

I had powerful weapons on my side, I thought.  I am unconstrained by mandates or the performance imperative.  I can invest in any micro-cap I please, and take extremely large positions.   I also thought I had the long term, calm, thoughtful temperament that a value successful investor required.  Finally, I thought I might be quite a good analyist.

Flybe was my biggest position and is now a zero.  Clearly my risk management skills are appalling and I’ve broken every rule in the value investment book.  Losing approximately 16% of my portfolio is embarrassing, but has also seriously set back my thought of one day being able to retire early as a wealthy man.  It’s clear, also that Flybe, has not been a one off.  For example:

Emeco: I bought this because I thought it was a cyclical net-net but I’d done no more than rudimental work into the actual economics of the business and industry.  

Coty:  I bought into a story stock – that of cost cutting and consolidation and clever management – while ignoring the fact that it is extremely indebted and without understanding the actual drivers of the business. 

It’s pretty hard to make decent returns when you have multiple big losers and I think my issue has also been selling too early because I am too anchored to P/E ratios and thoughts about what might be “expensive” Hence I sold Avesco, which was a multi bagger, as well as solid compounders like Markel and Johnson and Johnson.

I found this recent article in the Economist very interesting and I think it speaks perfectly to some of my issues: https://www.economist.com/finance-and-economics/2019/04/27/why-investors-are-careful-buyers-but-careless-sellers

I have always been a believer in a concentrated portfolio, as any good value investor should.  But that approach only works when you are an expert investment analyst and have the time to practice your craft.  That is not me, given I have a full time job that is not investing and, frankly, I have been a little lazy.

There’s one other thing – I may have been trying to be too “clever” in terms of worrying about taxes and trying to shuffle holdings between accounts, and sizing positions to try and avoid thresholds, and this probably led to me holding certain stocks for longer than I should and not buying other positions when I should.

Today, I have a portfolio that looks decidedly average, in terms of quality, and unbalanced.  I have c16% in Fiat, which does appear to be cheap, but can I really be confident the multiple will expand when it seems to have every long term trend against it?  I have over 10% in Jefferies, and we know that broker dealers are secularly challenged. 

Furthermore, we are facing one or both of a US recession at some point and a downturn in the long S&P bull run.  It would seem I am exposed to the falls without capturing much of the ten year gain.

So what now?  Well, I still believe in value investing to improve lives and I believe that investing in equities should work in the long run over bonds and property.  One has to believe in capitalism continuing to exist in some form although it’s going to be very challenged for quite a while.  I’m at the age now, where I need to own my forever home and I’m nowhere near the point where I can own it outright.  At some point I have to choose between putting my capital in a house, which I consider dead money, and trying to continue to grow my capital while renting.  I’m not quite there though yet, so here’s what I’m going to do going forward:

-      Target 9% as an annual return by buying stocks below intrinsic value.  I’ve calculated that this is the return I need in order to live the lifestyle I want and pass on something meaningful to my children.
-      Put another way, I won’t be trying to blow the lights out by being a superstar risk taker, and in years when I earn more than 9%, I will put cash aside as a buffer for bad years.  I can reconsider that approach in the future.
-      I will try and move up the quality scale and stop buying statistically cheap stocks, because my time horizon is long and buying quality should reduce the number of investment decisions that I have to make and will let me sleep better at night.  
-      Stop trying to be too “clever” in terms of my approach.  Terry Smith talks about “buying stocks that have already won”, rather than future winners and that is what I will try to do.  That said, I will still try and use the advantages that I have as a small investor to benefit from small cap or illiquid situations where the risk/return seems good.
-      Size my stocks far better so that a 10% position should only be appropriate if it doesn’t have much debt and the investment idea is strong and well researched, with minimal risk of losing money in the long term.  Good ideas with high levels of debt should get a much smaller position size.
-      Think more actively about selling.


It may take a few quarters to get to a portfolio that better reflects the above principals but I think it will make me a happier person. Life is a journey with many challenges, let us see what the next few investing years hold.

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