My Investment Journey Part 4: Years 2000 to 2007 by Stock Whittler (@dosh100)

 

As I came away from the eventual .COM carnage I started to realise that overall I had done reasonably well from that particular episode. I exited that couple of years with appreciably more funds than when I had entered but still felt that self-critical nagging that if only I had sold some of those high fliers earlier; maybe even got out at the top. As it happens I had learnt from my earlier experiences that once a good thing starts to come to an end, get out. On reflection although I had made money, I had not been that clever at all: I had really been a member of the herd running into IT stocks as if nothing else existed and in truth setting aside my earlier learning of trying to find and analyse growth companies that actually turned in profits year after year: it was time to head back to that base.

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So my approach from late 2000 was to revert back to trying to identify Zulu type growth companies but this time around it just did not seem so easy; it’s a simple fact that when the market is in a depressed mood even apparent high-quality businesses are held back. I was finding it a real battle to make much of an impact against a background of a steadily declining FTSE 100 that gradually fell from a high of about 6950 at the start of 2000 to a low point of 3300 in early 2003: times were tough and I was being ever cautious and sat on a fair cash-pile. From 2000 to 2002 I did not really make any significant money from the overall basket of stocks that I held; investment life was difficult as the FTSE ground out it’s slow yet relentless path to the eventual bottom. I suppose that I was managing to “hold my own” was down to much greater care than in the .COM herd time. Yet, I still kept beating myself up: hey, I was this kiddie who could do 40% a year in the late 90’s, why won’t it happen now? Yes, I know, on reflection plain delusion of an investor who had become accustomed to making easy money during the last half of the 1990’s. Incidentally during 2000 to 2002 was one of my busiest times in my working life, coupled with the fact that I had moved home into a very old building that became a restoration project, meant that I just did not have much time to meddle. The lack of trading in itself became a real lesson i.e. if you have done some decent research, limited risk by going for quality, then the best friend may well be time in the market. Also at this time funds were needed on the restoration project; the complete re-thatching of a large roof is a jaw-dropping cost but I guess that was a wise use of some of my previous market gains.

That dreaded herd mentality was definitely something I wanted to try and avoid in the future if at all possible. My stock purchases at this time were mostly those with potential for growth but also supplemented by ones that paid a decent yield hopefully to protect the downside and of course the majority of my detective/screening work would be via my trusty Company REFS which thankfully became available in a CD form. There were a few gems that I picked up in 2001/02 as VP at 92p, Wolverhampton & Dudley at an equivalent of just over a pound in today’s money, Fisher(James) and  Clarkson both at under £2. Just to give a flavour, my ISA & PEP accounts, yes they were separate in those days also included Hardy & Hanson, Greene King, Scottish & Newcastle, Prudential, Scottish Power, Azlan, Dairy Crest and Vodafone. Not a massive number of stocks but many of which I held onto for a few years and mostly rewarded my loyalty by becoming real stars which is more than I can say for Vodafone post the costly Mannesmann acquisition; the Vodafone performance proved a real drag on the overall portfolio. My mindset wanted to control risk in my ISA/PEP world and do the more risky stuff within my trading account; the logic being that at least I could recoup a percentage of the sillies via CGT offset.

In addition to the continued retracement after the .Com bubble there were, of course, worries when our old buddy Sadam had squirrelled away copious amounts of what became known as WMD. Thankfully, at least for investors, the Iraq question came to something of an end in early 2003 when we had the invasion of Iraq and Baghdad bounce. What a lovely time that was as we moved away from the cliff edge and into a beautiful incline FTSE 100 & FTSE 250 that would last for about five years.

The portfolio was chugging along really decently, no 40% years but the pot was larger and making respectable gains. Frustratingly over the period from 2003 to 2007, although I was making decent returns, for the first time in my investment journey I was falling behind the gains I would have enjoyed had I simply invested in the entire FTSE 250. Was I meddling too much or over trading? Maybe accepting a larger portion of risk with some AIM stocks: would I have been better off avoiding risky AIM stocks, just buying quality growth stocks and sitting on my fiddling hands? The answer is I don’t really think I will ever know for definite but I suspect the sitting on hands bit would have won the day.

As work quietened down a touch and the heavy time demanding house renovation eased, I had more time available, more time to research REFS for quality & growth; that was good but conversely, I also had the time to again chase a few story stocks in my dealing (non-ISA) accounts. The stocks making me profits after 2003 was quality stuff such as VP, Fisher, Clarkson, SDL, AMEC, Peacock, loads of breweries; I probably held stock in the majority of breweries at various times when I think back and let’s not forget banks and insurance companies. Yet it was the silly adventurous purchases mainly on AIM that kept my acceptable enough performance below that of the run-away FTSE 250. I was probably spending too much time reading about “hot stocks” on bulletin boards, a hot tip in IC or some other publication. Remember the “next big thing” types, the likes of Aerobox, Accident Exchange Group, Inion, Media Square, Bioprogress ; the inventors of the dissolvable colostomy bag, I mean can you imagine!. Still, I did learn valuable lessons from my BB experiences and just vowed never to get sucked in again by those claiming to be ITK; I was also bolting on to my armoury the knowledge that debt can be a killer to a small business.

Although this list of adventurous “next big thing” AIM stocks did not help portfolio progress they were mainly either cut at a 20% loss or on the first profits warning; to my mind valuable lessons that remain bolted onto mindset from that time onwards. Incidentally, a lesson for every investor to my mind is to have a decent number of reasonably diversified companies and concentrate on the overall basket performance. If you have to “gamble around the edges” then do this with a very limited percentage of your overall pot outside of your tax-free account; better still, if you need that style of excitement take up bungee jumping, glider flying or some other less dangerous pastime.

Within my “day job”, my own company, whose performance I never counted within my percentage returns as that was simply my good fortune of being in the right place at the right time, was bought out for almost £16 in 2006 by a consortium of Canadian and Australian insurance/pension companies. I was a very happy man as I had studiously taken up almost to the limit, every share-save offer with prices ranging from £2 to £6: I was just gob-smacked by the eventual return of funds. Totally no skill involved apart from the discipline of maintaining the continual drip feed purchase of AWG shares at an advantageous price and very importantly, the passage of time, in fact, lots & lots of time.

By mid 2007 the whole investment world was buzzing along cheerfully enough for me as I was close to being fully invested not solely in growth stocks but also in those lovely safe financial institutions namely the large unexciting insurance companies plus various banks including the newly listed ex-building society types; what lovely safe dividends these boys paid; I thought at the time what could possibly go wrong to rock this steady little investment world that I enjoyed?

Epilogue: Learning Points as at December 2007

Memo to myself in late 2007: Learning Points so far that I would do well to remember but being as fallible as the next person, would almost certainly temporarily forget from time to time:

  • Avoid bulletin board experts, they just simply claim to have the inside track knowledge and they invariably do not: some call it pump & dump.
  • Invest in quality data to aid your investment decisions: my thirst included Sharescope (I think it’s fair to say I was one of their earliest customers), Company Refs and SharelockHolmes.
  • Concentrate of quality and stocks that are already displaying the signs of being winners: increasing turnover, increasing profits, reasonable margin and a touch of momentum.
  • Try to only invest in companies that carry manageable or preferably no debt; screen out the others.
  • Look for companies that make decent returns on capital; ROCE
  • Try to avoid businesses with a touch of creative profit creation: CPS preferably greater than EPS; Cash-flow is just so important.
  • Try to have at least some degree of diversification across a few sectors and market caps.
  • Be a bit less critical of yourself as it’s almost a certainty that you will never get in at the bottom or sell at the top; don’t beat yourself up trying.
  • Have an exit plan for a stock; it’s all too easy to buy but selling requires a different discipline. For me, it was a 20% stop loss at this time or some knowledge that the original attraction for the investment had changed. You simply have to manage the downside risk.
  • Desperately try not to form an emotional attachment to a stock it has no emotion or feelings & can’t love you back; a Labrador can whilst a dog of a stock can’t.
  • If I you have to invest in anything that could be described as a story stock, a blue sky punt etc then don’t do this within your valuable PEP/ISA tax-free pot.

Would I remember all of these lessons and more importantly would I constantly apply them? Well, in truth, probably not!

Article written by @dosh100

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