27Aug 2016

My Investment Journey Part 7: Years 2013-16 by Stock Whittler (@dosh100)

Success.
The year of 2013 was very productive with a staggering performance of the FTSE 250 with many companies, about a dozen as I recall, increasing in value by over 100% and another 30 increasing by some 50%. The FTSE 250 appreciated by some 26%; indeed only about 12% of the FTSE 250 declined in value during that sweet year. How good was 2013 when compared to other recent years? Well, maybe the best way to answer that is to take a look at the wider indices the FTSE All Share which itself gained 17% in 2013 whilst only one of the bracketing years of 2011, 12 & 2014, 15 gave a positive return. So where does this lead us? Well to my view it just shows that the majority of the time we exist in a stock picker’s market. Yes, we can be risk averse and just simply go for an index tracker route or as I do, invest via the stock picking route. For myself, stock picking by and large has been for the best part of the last twenty years based on screening stocks (or may I say whittling) down the total universe of shares to come up with a relatively small number of shares for more in-depth investigation.

My process has become more honed over recent years and the whittling a touch more demanding. I still search for companies that offer the usual characteristics such as increasing revenue/profits, sustainable and decent margin and little or at least manageable debt but I have upped my game, at least I think I have, in terms of one of my main criteria, return on capital. As I continued to hone my approach I developed a liking for CROCI in addition to ROCE as the former is calculated on cash as opposed to profits. I just think it gives me a slight additional edge. I tend to mix that approach with what I perceive to be value opportunities; areas that the market for whatever reason has passed over or overlooked. It often takes a long time for these value types to deliver and personally I find it helps to adopt the sunk money philosophy; don’t fret just let the passing of time do it’s stuff yet if it appears I have got it wrong, don’t be stubborn, head for the exit.

Anyway, back to what was going on around this time: All In all 2013 was a very good year for investors but in 2014 & 2015 various factors weighed on the markets including the Eurozone crisis with Greece, Spain and Italy niggling away at the markets combined with worries regarding China’s slowdown. As investors we have to remember that markets, unfortunately, don’t appreciate every year; all part of the game but at least as individuals we can by whatever process we feel comfortable with, strive for an edge on the markets.

Assuming I have approached some degree of maturity over the investment journey, I felt some analysis of what was going on in my entire investment portfolio over the period 2013 to 2016 may be worthwhile. Note: I only went back and analysed the 2013-2015 happenings purely because of writing my journey articles; just shows how useful doing something like this can be as it prompts a bit of self-analysis and to my experience, we are not very good at that.

Over this three year period I owned about 120 stocks passing through or in some cases, still residing in my portfolio and a touch of detailed analysis from my ever reliable Sharescope shows the following from my combined trading and ISA accounts:

Of course for various reasons, not all stock investments turn out to be a success in your desired timeframe. I like to think that I purchased stocks that following my methodology have a reasonable chance of succeeding within that reasonable time frame. The way of the investment world is that even attractive companies can encounter problems such as product delays, contract delays, consumer slowdown within their area, competition, economic events etc.

Happily, my good purchases outweigh the ones that did not work out as planned, not only in terms of a number of stocks but also in terms of letting the winner continue to perform.
Within reason, without emotion, I cut the poor performers early and run the good performers but of course like all investors, I don’t always get it right: simply part of the territory that comes with investing in the stock market.

Over the last three years, I have been fortunate to hold businesses that have been the subject of a successful take over; I like to think this was because I had bought attractive businesses. Ones that did particularly well for me were:-
Kentz
Fiberweb
Anite
CSR
In fact, I added bit by bit to Kentz over a reasonable period and it paid handsomely.

Profits warnings over the period since 2013: well there were 8 in total, all of which I cut & run quite swiftly. It’s interesting to note that 7 of these stocks went on to significantly decline further in value, hence sticking what works well for me i.e selling on the first profits warning and moving on. Unfortunately after one profits warning there seems to be a good chance of a second and sometimes a third. I realise that this is a particularly personal one for each investor and to a fair extent it depends on the type of stocks that one invests in but my get out quick works for me by limiting my losses. Incidentally of those eight companies at the time of writing only Shoe Zone, sold on PW in April 2015, has recovered to my sale price: the others continued to drift lower after I sold. It’s important to remember that it’s not just small companies that can continue to fall after a profits warning; I sold Stagecoach for a 14% loss on their December 2015 profits warning, it has since drifted to a price at the time of writing that would have given me a 45% loss. As I say, this approach of cut and run following a profits warning does the trick for me. If the stock once again looks attractive, I can always go back and buy in again. I sold Tristel first thing on the day of their February 2016 profits warning for 123p for a return of 70%; I like the company and bought back in at 96p in early July when I felt they had bottomed out yet still looked attractive and I like the business.
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Profitable stocks I sold too early, yes we all have those, don’t we! Well out of the winners I would have done appreciably better to have held on longer for the ride: I am afraid that I sold the very impressive JD Sports way too early. I had a sizable position in JD and to be fair I made a very good return but on reflection, my reasoning for selling at the time was just not convincing. Similarly, I sold WH Smith the ultimate in boring stocks, the type I love, a touch too early for a 20% profit simply as I felt the price had stalled a touch: shame as there was another 30% in the tank. Similarly to profits warnings, I am not too proud to admit a mistake and bought back into JD Sports in following their Christmas 2015 trading update.

It is highly unlikely that I will have those unicorns we know as 10 baggers in my portfolio these days, well unless I hold some real quality for many, many years, and I think that largely reflects the investment style that I have developed. To explain that further, the rapid rise 10 bagger type stocks are to my mind more associated with stocks with potential to become winners and possibly a touch more speculative than the stocks I currently deal with. I would guess that an investor would only come across those a couple of times in an investing lifetime and I have probably had mine with the likes of Helphire many years ago. My style is to search for quality stocks that are currently winners and will hopefully stand a better than average chance of continuing to be winners.

In terms of measuring my portfolio performance, unless I am doing something of a project style piece of work, I stick to assessing performance over a financial year. A few years ago I was constantly assessing portfolio performance and in reality, for the majority of the time just seeing the effects of market noise which as I have said before I studiously strive to block out these days. So for me the major assessment is done at the end of the financial year this makes sense as it fits with CGT and ISA allowances. I really do not fret over the day to day valuation moves within my portfolio; personally checking over frequently just does not lead to a relaxed investor, at least as far as my personality is concerned. Actual performance over the financial years 2013, 14 & 15 has been very pleasing, well it has certainly kept me very happy. As for the financial year 2016, to date, it’s been a tougher start to the year with many small market cap stocks, recruitment stocks, house-builders been affected by the Brexit surprise and at the time of writing the portfolio is down 0.7% since 6th April 2016. Will things improve over the next eight months? Well if the capital remains static, dividends should at least take us into positive territory but who knows what the remainder of 2016/17 will deliver and I must admit I remain a touch bearish.

I still continue to read investment books; as a scientist, I collect and assess information; I enjoy it and I guess I will never change. However, of all of the investment books I have read and it’s a lot, I would say only a very few merit the usual 200 or so pages that’s often dedicated to padding or waffle. This comment even applies to Joel Greenblatt’s book that could be slimmed down and called the Incredibly Little Book That Beats the Market. Just so many could have been condensed to say 20 or 30 pages to adequately get the message over but there again would the average person spend say £20 on such a short publication? Hang on, I feel another blog subject coming on here!

I have mentioned before that a need to have a punt exists within me, after all, I am the guy who spent many an hour in the bookies in my earlier years searching for that perfect Yankee. I have been a very well behaved boy lately with very few punts; my last one, Seeing Machines, I closed in early 2015 for a modest 15% profit; I am not sure I will continue to be good but at least I will try.

Heavens I almost forgot to mention Twitter! I first opened a Twitter account back in 2011 simply to get the Luton Town FC team news an hour before kickoff time: rather nice to get advance footy news whilst in some local ale house sipping a pint of a local brew. It was not until the middle of 2015 that I had a look at some investment activity on Twitter; from there on in it developed for me and I met, albeit electronically, some very pleasant and genuine folk who go out of their way to help fellow investors. It’s a nice community and I am happy to be part of it. I post on Twitter usually in the early part of the day, around 7am, commenting on any RNS that may be loosely linked to a stock I have an interest in. I comment at the time of my Tweet if I have a holding in that particular business or if it’s on the watch list etc.

Am I a better investor now than when I was investing say 15-20 years ago? Well I like to think so, I have learnt a lot then sometimes forgotten some of the lessons and repeated mistakes but on the whole most lessons have been digested and proved of benefit to me.

So after seven episodes, well eight really as I did a part 3a & 3b, my journey comes to a temporary pause and maybe in three or so years time I will give an update on progress. Oh, hang on, there is one more part I am working on that will be published in a week or two and that will take the form of a summary of what I have learnt during the 25+ years of stock market investing.

I have enjoyed writing the journal and really feel that a touch of inward self-analysis is a good thing. Also, I hope that you have enjoyed my whittling on over the course of my investment journey; if there are any scraps in there that may be of help to others then I will have achieved my goal.

Happy Investing.

Article written by @dosh100

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