It’s important that investors do not get too attached to a company - you can’t treat it like a grandchild.
The way to do that is to fully understand it, to figure out the business model, the competitive edge, and the competence and integrity of the managerial team. If any of those fundamentals deteriorate you have to say goodbye to it. “One rule you want to remember: the stock does not know you own it.” (Peter Lynch 8 October 1994 Lecture to the National Press Club) Don’t flit Also, if the company is doing well, and you reason that it will keep doing well, then hold onto it. By “well” I mean that the discounted value of future cash flow is more than the current market price. You must keep up to date with your company and periodically refresh your analysis, including new discounted cash flow (or earnings) estimations. Following this rule you might find that even though your company’s share has doubled or trebled it is still a good hold because the updated discount calculation shows much higher value that you first worked out. Often the best shares are the ones I’ve been holding for many years. To emphasize: you have to understand it to be able to stay with it. Don’t be always fearful We have had two major shocks to the economy, and therefore the stock market, in the last three years, firstly Covid and then high inflation followed by raised interest rates. These were serious things to be concerned about. And serious things similar to these will occur once or twice in the decade ahead, probably. But you can’t let these sorts of threat paralyse you into never going into the market and buying shares. Most of the time the best advice for a long term investor is to keep on investing despite worries – most of these worries are not on the same scale as Covid or the inflation scare. Furthermore, other investors have probably already pushed down share prices to incorporate the concerns. So keep going on share investing, and only expect big crises to come along every decade or so. If you over-worry you’ll miss a decade's worth of returns. Right now I’m 100% invested in UK equities despite the lingering concerns about inflation and recession. I regard these concerns as being of a normal order and not big. I’m reassured that while inflation seems high right now it won’t be come Christmas (the price of gas, for example, was €343 per MwH in August last year; it is €40 now. Things like this will push headline inflation below core inflation soon, which will have implications for people’s mood, growth and interest rates) Peter Lynch: “If you own stocks there’s always something to worry about. You can’t get away from it. What happens in the 1950s, people were worried about the only reason we got out of the Depression was World War II. We got another recession in the early 1950s and we said we’re going to go right back into a depression. People were worried about a depression in the 1950s, and they were worried about nuclear war.” (Peter Lynch 8 October 1994 Lecture to the National Press Club). The 1950s were a great time for investing. Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to [email protected]) Risk Warnings: Past performance is no guarantee of future results. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Opinions constitute our judgement as of this date and are subject to change without warning. Neither Henry Spain nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this Leaflet. Before contemplating any transaction, you should consider whether you require any advice from a financial adviser which we would be happy to provide. The Managed Portfolio Service will be a fully advised process and advise charges will apply. This is a financial promotion. Henry Spain is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 7118506. Registered Office: 49a High Street, Market Harborough, Leicestershire, LE16 7AF.
0 Comments
Many people contemplating being a share investor hesitate because they think they don’t have an edge, an extra insight into companies and sectors. This is usually untrue.
If you have worked in the motor industry, for example, say in sales, or manufacturing, you might be very familiar with the companies. You might know which have the best managers and which have a great new product line-up. This is the sort of knowledge that can give you an edge. You only need a few good share buys a decade to perform well over time. So you can bide your time, only buying a company’s shares when all the qualitative and quantitative factors are right AND the share is selling at such a low price so as to give an adequate margin of safety. There is no rush to build a portfolio; a few stocks that you know really well is far better than 50 that you know little about. Peter Lynch said “When your lifetime is over, you don’t need a lot of five-baggers to make a lot of money starting with $10,000 or $5,000. So, in your own industry you’re going to see a lot of stocks. There are good stocks out there looking for you and people aren’t listening and they’re just not watching. They have incredible edges.” (Peter Lynch 8 October 1994 Lecture to the National Press Club) Peter Lynch, one of the greatest ever investors with an extensive knowledge of some industries, had great respect for ordinary folk who possess special knowledge about certain industries, they know a lot and stuck within their circle of competence: “People have big edges over me. They work in the aluminum industry. They see the aluminum industry inventory coming down six straight months. They see demand improving. In America today, you know it’s hard to get an EPA permit for a bowling alley, never mind an aluminum smelter. So, you know when aluminum gets tight; you just can’t build seven aluminum smelters. So, when you see this coming, you can say, “Wait a second. I can make some money.” When an industry goes from terrible to mediocre, the stock goes north. When it goes from mediocre to good, the stock goes north. When it goes from good to terrific, the stock goes north. There’s lots of ways to make money in your own industry. You can be a supplier in the industry. You can be a customer. This thing happens in the paper industry. It happens in the steel industry. It doesn’t happen every week, but if you’re in some field, you’ll see it turn. You’ll see something in the publishing industry. These things come along, and it’s just mind boggling that people throw it away.” (Peter Lynch 8 October 1994 Lecture to the National Press Club) Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to [email protected]) Risk Warnings: Past performance is no guarantee of future results. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Opinions constitute our judgement as of this date and are subject to change without warning. Neither Henry Spain nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this Leaflet. Before contemplating any transaction, you should consider whether you require any advice from a financial adviser which we would be happy to provide. The Managed Portfolio Service will be a fully advised process and advise charges will apply. This is a financial promotion. Henry Spain is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 7118506. Registered Office: 49a High Street, Market Harborough, Leicestershire, LE16 7AF. Ideally, we investors would pick up brilliant investments like Walmart when it only has a handful or stores, or Microsoft before the PC software revolution really took off. But this is simply not possible for most of us. We only discover later in the day that these companies are so well run and so dominate their markets that they are destined to produce good dividends for shareholders.
Does that mean that you are always going to miss out unless you are lucky enough to have personal knowledge of a nascent Great? It turns out that there are opportunities to benefit from the continued rise long after millions of investors are aware of the company . For example, by the 1980s everyone knew that Coca-Cola was a great brand and had terrific distribution. It’s shares were not obviously cheap relative to the market average PER based on past earnings. But, in the eyes of Warren Buffett they were cheap relative to future profits to be boosted by raising margins and through international expansion. Berkshire Hathaway spent about $1.3bn buying 400,000 Coca-Cola shares between 1988 and 1994. Today those are worth over $25bn. (It was a similar story for 1930s investors in Coca-Cola, or those in the 1950s or 1960s). Peter Lynch points to another great American company that was an excellent buy when it was very small, but was still a good buy once it was well-known, that of WalMart. “People are in an unbelievable rush to buy a stock. I’ll give you an example of a well-known company. Walmart went public in October of 1970; 1970 it went public. It already had a great record and had 15 years’ of performance; great balance sheet. You could have waited ten years, saying you’re a conservative investor and you’re not sure this Walmart can make it. You want to check. You see them operate in small towns. You’re afraid, they only operate in seven or eight states. You want to wait until they go to more states. You keep waiting. You could have bought Walmart 10 years after it went public and made 35 times your money. If you bought it when they went public, you would have made 500 times your money, but you could have waited 10 years after Walmart went public and made over 30 times your money.” (Peter Lynch 8 October 1994 Lecture to the National Press Club) Lynch also cites Microsoft: “You could have waited three years after Microsoft went public and made 10 times your money…If you knew something about software (I know nothing about software) you would have said, “These guys have it. I don’t care who’s going to win, Compaq, IBM. I don’t know who’s going to win, Japanese computers. I know Microsoft MS-DOS is the right thing.” You could’ve bought Microsoft.” (Peter Lynch 8 October 1994 Lecture to the National Press Club) Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to [email protected]) Risk Warnings: Past performance is no guarantee of future results. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Opinions constitute our judgement as of this date and are subject to change without warning. Neither Henry Spain nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this Leaflet. Before contemplating any transaction, you should consider whether you require any advice from a financial adviser which we would be happy to provide. The Managed Portfolio Service will be a fully advised process and advise charges will apply. This is a financial promotion. Henry Spain is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 7118506. Registered Office: 49a High Street, Market Harborough, Leicestershire, LE16 7AF. Imagine that you expect to buy something on a regular basis for the next couple of decades, say a Big Mac or golf club membership. So the question is: would you prefer it if the purchase price fell or went up over time?
Exactly. You want prices to fall so that you gain the value at less expense. And so it is with shares. If you have analysed a company and concluded that each share is worth X, would you prefer it if the price Mr Market is asking goes to X + 30% or to X – 30%? If you are not a dis-investor, i.e. running down your portfolio, my guess is that as more cash comes in you’ll want to pay a lower price that gives you that great value, a price lower than expected, or indeed what you might have paid only a couple of months ago. So, for those shares you’ve bought which then fall in the market by say 30%, celebrate. This is the time to buy VALUE at a lower PRICE. If you have thoroughly analysed the intrinsic value coming from the likely future income flow to shareholders then you welcome lower prices. (I did this with my Smiths News investment, eventually buying half my holding at 15.1p (averaged paid 28p). They are now 52p, and I believe intrinsic value to be £1 - see newsletters in 2020 on Smiths News) When will the market price rise up to your intrinsic value estimate? Nobody knows. But it will eventually. There will be some sort of trigger, maybe two or three years down the line, that will switch Mr Market’s attention to your company. You just have to buy when there is a large gap between value and price – and then be patient (and hope you can buy some more at an even lower price). What about market declines? The FTSE 250 index of medium sized UK is down over the last 20 months by 21% and a very high proportion of UK shares are on single digit price earnings ratios. Mr Market has had a shock and is in a mood for giving away many good quality shares at bargain prices. In many cases intrinsic value is double the asking price. It’s a great time to be an investor in UK shares. And in the future you will experience a decline in the market of at least 10% roughly every two years (a “correction”); and roughly every six years we’ll experience falls of 25% or more (a “bear market”) – of course, they won’t come at neat intervals, you might get two in consecutive years and then none for a decade. Dramatic market declines are normal. What is abnormal is people’s reaction to them. Instead of saying “great, now I can buy value at a lower price” they say “oh no, I’m 25% poorer. I hate shares. I’m going to be ultra cautious in future, at least for a while”. (Value has not decreased - it's the same as it was before Mr Market changed his mood) Then, later, these people will get excited about buying shares after they have risen a lot “look, shares have been a great investment the last couple of years, I’m going to jump on board this train” – all caution going out the window then. Peter Lynch, a great investor, said “You should study history…You need to know the market is going to go down sometimes. If you’re not ready for that, you shouldn’t own stocks… And it’s good when it happens {a market decline}. If you like a stock at $14 and it goes to $6, that’s great. You understand the company. You look at the balance sheet. They’re doing fine. You are hoping to get to $22 with it; $14 to $22 is terrific, $6 to $22 is exceptional, so you take advantage of these declines. They’re {declines} are going to happen, and no one knows when they’re going to happen. People will tell you after the fact that they predicted it, but they predicted it 53 times. So, you can take advantage of the volatility of the market if you understand what you own. So, I think that’s a key element.” (Peter Lynch 8 October 1994 Lecture to the National Press Club) Professor Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to [email protected]) Risk Warnings: Past performance is no guarantee of future results. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your initial investment. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. Opinions constitute our judgement as of this date and are subject to change without warning. Neither Henry Spain nor any connected company accepts responsibility for any direct or indirect or on sequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon any information contained in this Leaflet. Before contemplating any transaction, you should consider whether you require any advice from a financial adviser which we would be happy to provide. The Managed Portfolio Service will be a fully advised process and advise charges will apply. This is a financial promotion. Henry Spain is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales No. 7118506. Registered Office: 49a High Street, Market Harborough, Leicestershire, LE16 7AF. It is hard work being a true investor – so many things to analyse. This means you do not have time to waste on pointless activity. The vast majority of your attention must be directed to business analysis. As Peter Lynch said “Stocks are not lottery tickets. There’s a company behind every stock. If a company does well, the stock does well. It’s not that complicated.” So concentrate on what makes the company do well.
Here are a few things people waste time on
Weirdly, we had two hits of this nature in just three years. Fortunately, some of us spotted the ingredients for macroeconomic trouble from Covid when it was still pooh-poohed as a likely problem by leaders in this country, so I was able to sell shares vulnerable to recession into a sanguine market willing to pay good prices. The second macro issue was the excessive economic stimulus from loose monetary policy and very generous fiscal policy (stuffing money into people’s pockets). All the ingredients were there for a boom, followed by inflation, and then central bank reaction. It seemed to me fairly predictable – so I enjoyed the boom with lots of equities, and enjoyed the inflation period with lots of cash so I could hunt for bargains when Mr Market was gloomy. We are no longer in extraordinary times and so the macro side of my brain can go back to sleep – just occasionally to open an eye every now and then to see if there is anything threatening. I hope the macro peace - with normal fluctuations and concerns to be sure - continues for a couple of decades now so I can be fully invested in UK equities all the time. The type of economics that is very useful So macroeconomic prediction have very limited value. But other economic data, things like what is happening to used car prices when you are analysing a car dealing chain are very useful, or what happening to the price of ethylene when you are looking at chemical companies, or to house prices if you examine a house building firms. Now those are truly valuable things to follow. Prof Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to [email protected]) A golden rule of investing is to understand what you are buying. How can you possibly understand a company unless you spend time analysing it – looking at its strategic position, the quality of the managers, its financial position, and so on?
Instead of that hard graft the inverted-commas-investors – who should really be called speculators – buy on the basis of what they read in an article ("the writer must be smart, so I go with that"), or they fancy that segment, "lithium is on the rise so I’ll buy anything connected with lithium", or with solar panels, and so on, and so on. The strange thing is people are not like this in ordinary life. If they are buying a new car they’ll gather loads of info; if they are thinking of new computer they’ll turn to WHICH? But when it comes to spending ten times as much on some shares they give it about five minutes and most of that is relying on other people’s thinking. Peter Lynch, one of the greatest ever investors, observed the same human tendency to self-contradiction 29 years ago. In an interview back then he noted “The public, when they buy a refrigerator they go to Consumer Reports. They buy a microwave oven, they do that. They ask people what’s the best kind of radar range or what kind of car to buy. They do research. On apartments. When they go on a trip to Wyoming, they get a Mobil travel guide or California. When they go to Europe, they get the Michelin travel guide.” (Peter Lynch 8 October 1994 Lecture to the National Press Club) But, observed Lynch, it’s different with shares: “People hear a tip on a bus on some stock, and they’ll put half their life savings in it before sunset. And they wonder why they lose money in the stock market. And when they lose money, they blame it on the institutions and program trading. That is garbage. "They didn’t do any research. They bought a piece of junk. They didn’t look at the balance sheet and that’s what you get for it. And that’s what we’re being driven to and it’s self-fulfilling. The public does terrible investing and they say they don’t have a chance. It’s because that’s the way they’re acting. I’m trying to convince people there is a method. There are reasons for stocks that go up.” Prof Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to [email protected]) Looking at some of my recent newsletters you may be getting the impression that you need to be a top-notch professional investor to out-perform the market. After all, you are required to be intensely curious about business, economics and world affairs, and be familiar with key accounting tools, finance, corporate strategy, and so on. And then you need to apply yourself to a pretty deep analysis of a company.
How can a non-professional person manage all that? Well, curiosity about business, economics and world affairs is surely part and parcel of being a generally intelligent switched-on person. It doesn’t require exceptional knowledge just a good grounding combined with a determination to keep learning more every day. Likewise, your knowledge and use of the tools of accounting, etc., will grow if you are genuinely interested in understanding companies and how they tick. It should not be too onerous if you genuinely believe that businesses, their models, the customer-supplier relationships and the rationality of managers are fascinating topics to ponder. If you don’t think like this, if you don’t, and never have, taken an interest in how businesses are run and what makes for success or failure, then perhaps investment is not for you. But if you are here, reading this, the chances are you do have this interest, and you want to keep developing yourself by learning new things every day. For you investment success is at least as likely as it is for the “professional” investor. After all, the so-called professional starts off with a number of disadvantages, for example, (1) they are only allowed to invest in one-half of the companies on the stock market and so miss many bargains in smaller companies (the liquidity fetish) (2) they tend to diversify beyond the rational level, leading to, firstly, moving too far down the marginal attractiveness curve (why invest in company number 50 on your list when you could put more into companies 1 to 15) and, second, because they handle so many companies they never get to know any of them very well. (3) they are susceptible to group-think (example: 18 months ago it was fashionable to say inflation was transitory and would not bother the stock market. As you know, I took a different view and moved to 40% cash in anticipation of inflation, raised interest rates and falling share prices, so 2022 was a very good year for me). But it’s still a daunting prospect for the average small amateur investor, I know. One way of taking the pressure off yourself is to avoid analysing sectors that are very difficult. There are plenty of good companies in sectors that are either inherently easy to understand (we’re all familiar with them and there is little change from one decade to the next in terms of competitive dynamics) or in sectors where you have some specialised knowledge. Perhaps you are/were an engineer and can understand engineering companies better than most, or you are/were a doctor and so find it relatively straightforward to follow medical instrument or pharma companies. Remember: there are no extra points in investing for taking on extra difficulty, unlike in Olympic diving. Peter Lynch, one of the greatest investors who very successfully ran the Magellan fund at Fidelity, had some encouraging words for the non-professional investor: “It’s a tragedy that the small investor has been convinced by the media: the print media, the radio, the television media that they don’t have a chance. The big institutions with all their computers and all their degrees and all their money have all the edges and it just isn’t true at all. “When they believe it, they buy stocks for a week, they buy options, they buy the Chile fund this week and next week it’s the Argentina fund. And they get results proportional to that kind of investing. And that’s very bothersome, I think the public can do extremely well in the stock market on their own. I think the fact that institutions dominate the market today is a positive for small investors because institutions push stocks to unusual lows, they push them to unusual highs. For someone that can sit back and have their own opinion and know something about an industry this is a positive; it’s not a negative.” (Peter Lynch 8 October 1994 Lecture to the National Press Club) Key rule that can be followed by amateurs – KNOW WHAT YOU OWN Peter Lynch: “And the single most important thing to me in the stock market, for anyone, is to know what you own. I’m amazed at how many people own stocks, they would not be able to tell you why they own it. They couldn’t say in a minute or less why they own it. Actually, if you really press them down, they’d say, “The reason I own this is the sucker is going up.” And that’s the only reason. “And if you can’t explain to a ten year-old in two minutes or less why you own a stock, you shouldn’t own it. “I made money in Dunkin’ Donuts. I can understand it. When there was recessions I didn’t have to worry about what was happening. I could go there, and people were still there, I didn’t have to worry about low-priced Korean imports – you know, I could understand it. And you laugh, I made 10 or 15 times my money in Dunkin’ Donuts. Those are the kind of stocks I could understand. If you don’t understand it, it doesn’t work. This is the single biggest principle.” (Peter Lynch 8 October 1994 Lecture to the National Press Club) Surely you can analyse the modern equivalent of the nascent “Dunkin’ Donuts” without feeling intimidated? Don’t even try to examine the latest computer firm offering SRAM CMOS bipolar RISC floating point data I/O array processor with an optimizing compiler….Even if you thought you understood it, by next year that sector will have moved onto something else equally baffling to us. Warren Buffett has three (metaphorical) piles of paper on his desk: The first is a very small pile of companies that he understands and has invested in , the “YES” pile. The second, much larger pile, is companies he has examined but rejected, the “NO” pile. The third pile reaches all the way to the ceiling. This is “DON’T KNOW” or “CAN’T UNDERSTAND” pile. This is the man who has spent 80 years analysing companies and still he says most are beyond his circle of competence! You simply do not need that many good companies you do understand in a portfolio to do well. Prof Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to [email protected]) John Templeton, one of the early pioneers of global investing, founder of the Templeton Growth Fund in 1954 which grew into one of the most successful investment funds, once said that “To be successful in investing, you have to keep changing your ideas all the time, more than once a year.”
For example, with this attitude he was able to exploit exceptional lowly priced Japanese shares (PERs around 4 - 5) in the 1950’s because he had the flexibility of mind to switch from the consensus view that Japan was merely a bombed-out manufacturer of poor quality items. “I knew that it had a great future. So we invested more and more wherever we could find bargains. One of our basic principles in investing is to buy wherever things are the lowest price. And you can only get things at a low price if somebody's selling. Nothing else pushes your share down except all the people selling. So people were selling in Japan after the Second World War and the bargains were there and we loaded up on them.” (TV Interview with Charlie Rose 14.5.97) He similarly looked at South Korean shares and later Chinese shares when they were cheap, but most people stayed away. These acts required an enormous degree of mind-independence, and a willingness to change a view. During the development of countries or companies there are long periods when it doesn’t make sense to invest. It might be that the political and economic risks are just too great, or the culture is wrong for busineses to survive. But, if you keep looking, keep analysing, then there might come a time when you need to change your mind and buy big. Another example from John Templeton’s life, again massively against the consensus: “Well, it was clear if ever the companies that are worthless and are losing money ever come back to life, it's during a major world war. So the a couple of days after Hitler invaded Poland, I looked over, all the New York Stock Exchange and the American Stock Exchange. There were 104 companies whose prices had gone down below a dollar a share. And so I called up Dick Platt [broker] and said, ''Buy me $100 worth of everything below a dollar a share'' and he called back and said, ''We're doing it, but 37 of them are in bankruptcy.'' And I said, ''Those are the best of all.'' The one outstanding one, Charlie, was the $7 preferred stock of Missouri-Pacific Railway. It had gotten down to 12 cents a share.” (TV Interview with Charlie Rose 14.5.97) Railroad traffic increased with the war and Missouri-Pacific became profitable and Templeton sold for a 3,900% profit In identifying bargains Templeton’s main focus was on earnings but he incorporated many factors, not least the business environment in which companies operated. This required an extensive knowledge of countries, companies, economics and culture. He also wanted low price in relation to growth trend…in relation to dividends…in relation to book value…and, in relation to competitors. But note even this great investor got it wrong a good proportion of the time – which is some comfort to those of us who have a less than perfect record. Templeton told Charlie Rose in 1997 that “at least one third of the time, my investments have been wrong”. Final note: ideas on what is a good investment may change, but sound investment principles do not change. Prof Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to [email protected]) The market has been having a hard time of it recently. In 2022 the FTSE250 index of medium-sized companies fell 19%, followed by no return in the first quarter of 2023. Fortunately, I guessed there might be tough times, and in February 2022 moved to 40% of my portfolio to cash, ready to deploy when Mr Market’s fear became really manifest.
Having a significant amount of cash helped the portfolio maintain value, but what gave it a real boost was that the few shares I held onto generally moved up, some by a significant margin. Smiths News’ shares rose by 30% in the fifteen months to the end of March – a nice rise. And that is before accounting for its significant dividend: 2.75p paid 9th Feb 2023, following 1.15p Feb 2022 and 1.4p in July. Total dividends in the last fifteen months amount to 14% of the January 2022 share price of 37.6p. bp rose from 400p on 26th January (buying date) to 532p at the end March 2023, a 33% return before accounting for a very welcome dividend of 6%. Coping with two major economic crisis, first Covid then inflation/recession Back in early 2020 I followed a strict caution-first value investing approach at the beginning of the Covid-19 crisis and, similarly to Feb 2022, went to 40% cash. This pile of money was very useful later in 2020 and 2021. The shares bought in those years have generally risen nicely – see first table. A list of all the shares I bought in the Covid-19 crisis and subsequently (up to end 2022) CompanyPurchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023 Smiths News (Connect Group)18.3.20 £0.151 5.8p £0.488 262% Character5.6.20 £2.52 37p £3.80 65% McCarthy & Stone1.10.20 £0.718 0 Sold 7 Dec 2020 £1.185 65% Capital & Counties Properties6.11.20 £1.032 0 Sold 19 Aug 2021 £1.743 69% Dewhurst “A”11.11.20 £5.94 38p £6.40 14% MS International16.12.20 £1.292 10p Sold 20.9.21 – 7.6.22. £2.488 100% Wynnstay29.12.20 £3.405 15p Sold 24.3.21 – 3.2.22 £5.58 68% Lloyds Bank12.3.21 £0.4169 3.37p £0.4902 26% J Smart18.3.21 & 24.3.21 £1.253 3.22p Sold 7 Feb 2022 £1.575 28% Fletcher KingFeb 20 – May 21 £0.3265 0.5p Sold Sept 21 – Feb 22 £0.40 24% Orchard Funding7.6.21 £0.568 6p £0.415 -16% Caffyns22.6.21 £4.65 30p £5.25 19% Highcroft22.7.21 £8.75 78p £9.10 13% Town Centre Sec10.8.21 £1.426 1.75p Sold 2 Feb 2022 £1.581 12% bp26.1.22 £4.006 24.1744p £5.32 39% Orchard Funding7.12.22 £0.48 2p £0.415 -9% Tandem2.12.22 £2.8221 0 £2.55 -10% AVERAGE 45%All the investments I made through my personal accounts over the nine years or so of writing on ADVFN (after I quit my university chair to concentrate on investing), are shown in the tables below. On ADVFN you can still read the rationales I advanced at the time of buying. More recently, I have transferred shares and cash to my account within the Managed Portfolio Service at Henry Spain Investments. With that, I decide which shares are held. My clients each have their own MPS accounts at Henry Spain and I select the same shares for them. My intention is to move the bulk of my investment money to my MPS so that I eat my own cooking alongside my clients. This might take a few months, as I’m waiting to sell some and then transfer the cash – but need to hold fire until they are ripe for selling (some will be transferred in specie, but I can’t transfer them all as it would unbalance the MPS accounts, e.g. too much Smiths News). I’m sorry, but I cannot divulge the shares I’ve selected for the MPS, because to do so would be unfair on my clients and might influence the prices at which I can buy in the future. Longer run performance When, in the summer of 2013, I quit being a professor, teaching at Schroders and book writing so that I could concentrate on investment the FTSE 100 was around 6,600. It is now 7,742 – a slow rise. In addition, there have been dividends of around 3% per year. The FTSE 250 index has moved from around 15,000 to 18,797. The numbers in the tables below show that I have significantly outperformed, which is quite a relief given the salary and security sacrifice I made all those years ago. The tables display the results (so far) of all the purchases I’ve been writing about in my newsletters. Because the comments I made at the time explaining the rationale for each investment are available for you to read in older newsletters there is nowhere for me to hide from my appraisals I made three, four or seven years ago – all the errors of omission and commission are there in broad daylight. I present the returns after taking the hit on broker costs, stamp duty and bid/offer spread. (Criteria for my portfolios after briefly described after the performance tables.) The 2013 Net Current Asset Value, NCAV, portfolio CompanyPurchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023 French Con.25.7.13 £0.3047 zero Sold July 2015 £0.4378 44% Caledonian T25.7.13 £0.70 zero Sold April 2020 £1.391 99% Fletcher King6.8.13 £0.30 14.25p Sold June 2016 46p 101% Northamber22.8.13 £0.287 1.6p Sold Oct 2016 £0.303 11% Titon5.9.13 £0.379 6.5p Sold May 2016 £1.06 197% Mallett12.11.13 £0.7682 12.7p Sold Nov 2014 £0.60 -5% AVERAGE 75% The 2014 NCAV portfolio CompanyPurchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023 Holders Tech10.10.14 & 3.11.14 £0.47 1p Sold March 2017 £0.33 -28% Airea4.11.14 £0.1195 0.9p Sold Sept 2016 £0.309 166% Northamber17.11.14 £0.4265 0.7p Sold Oct 2016 £0.303 -27% Caledonian T30.12.14 £1.39 zero Sold April 2020 £1.391 0 AVERAGE 28%The 2015 NCAV portfolio CompanyPurchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023 PV Crystalox15.1.15 £0.122 zero Sold Dec 2016 £0.237 94% Arden Partners1.9.15 £0.422 1p Sold May 2018 £0.364 -11% Northamber4.9.15 £0.443 0.4p Sold Dec 2016 £0.303 -31% AVERAGE 17%The Buffett-style portfolio This type of share is rarer than the others, and so I combine all years. CompanyPurchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023 Dewhurst9.4.14 £3.18 70.5p Sold Feb 2020 £7.217 149% MS International9.10.19 £1.723 13.50p Sold 20.9.21 – 7.6.22. £2.488 52% Character20.1.20 & 5.6.20 £2.811 45p £3.80 51% Dewhurst11.11.20 £5.94 38p £6.40 14% MS International16.12.20 £1.292 10p Sold 20.9.21 – 7.9.22. £2.488 100% AVERAGE 73%(I bought some more of Dewhurst in June 2014 at £3.11, December 2014 at £3.75, November 2017 at £5.46, February 2019 at £5.54 and April 2019 at £5.64. These were sold Feb 2020). Modified price earnings ratio portfolio 2015/16 CompanyPurchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023 Haynes11.2.15 £1.159 33.5p Sold 2.10.19 £2.9175 181% AGA11.3.15 £1.002 zero Taken over June 2015 £1.456 45% Hogg Robinson10.4.15 £0.4709 2.37p Sold June 2016 £0.656 44% MS International3.7.15 £1.86 46p Sold 20.9.21 – 7.6.22. £2.488 58% BHP Billiton24.9.15 £10.43 127p Sold May 2018 £16.90 74% TClarke5.11.15 £0.7916 13.61p Sold Feb 2020 £1.1215 59% Premier Farnell8.4.16 £1.222 3.6p Taken over 20.6.16 £1.632 36% AVERAGE 71%The AGA holding was doubled 30 April 2015 at a price of £0.9466. Modified price earnings ratio portfolio 2017 CompanyPurchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023 Braemar28.6.17 £2.848 20p Sold June 2018 £2.639 0% Caffyns10.8.17 £5.012 52.5p Sold July 2020 £2.389 -42% Connect/Smiths News27.9.17 £1.046 16.1p £0.488 -38% MS International14.11.17 £1.84 30p Sold 20.9.21 – 7.6. 22 £2.488 52% AVERAGE -7%The 2017/18/19 NCAV portfolio Purchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023 Caledonian Trust7.11.17 £1.23 zero Sold April 2020 £1.391 13% J Smart30.1.19 £1.13 4.14p Sold Mar/Apr 2020 £1.101 1% Northamber6.12.19 £0.504 0.3p Sold Mar 2020 £0.5717 14% AVERAGE 9%More Caledonian Trust shares bought in February 2019 at £2.29. More J Smart bought 30.4.19 at £1.16 The 2018/2019 modified price-earnings ratio portfolio Purchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023 Connect/Smiths News14.6.18 £0.285 9.40p £0.488 104% N Brown17.8.18 £1.42 9.93p Sold Sept 2021 £0.557 -54% Spaceandpeople31.10.18 £0.224 0.5p Sold Dec 2020 £0.128 -43% Tandem2.4.19 £1.59 9.49p Sold Aug 2020 £3.707 139% MS International6.6.19 £2.22 20p Sold 20.9.21 – 7.6.22. £2.488 21% Character25.10.19 £3.506 50p £3.80 23% AVERAGE 32%More Connect Group shares bought in February 2019 at 40.86p, March 2019 at 38.29p and May 2019 at 39p. More N Brown bought May 2019 at £1.30. The 2020/21/22 modified price-earnings ratio portfolio Purchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023 Wynnstay7.1.20 & 29.12.20 £3.33 29p Sold 24.3.21 – 3.2.22 £5.58 76% Daejan5.2.20 £52.90 zero Sold 21 Feb 2020 £79.41 50% Connect/Smiths News18.3.20 £0.151 5.8p £0.488 262% Lloyds Bank12.3.21 £0.4169 3.37p £0.4902 26% bp26.1.22 £4.006 24.1744p £5.32 39% Tandem2.12.22 £2.8221 0 £2.55 -10% AVERAGE 74%The 2020/21 NCAV portfolio Purchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023 McCarthy & Stone1.10.20 £0.718 0 Sold Dec 2020 118.5p 65% Capital & Counties Properties6.11.20 £1.032 0 Sold 19 Aug 2021 £1.743 69% J Smart18.3.21 & 24.3.21 £1.253 3.22p Sold 7 Feb 2022 £1.575 28% Fletcher KingFeb20 – May21 £0.3265 0.5p Sold Sept21 – Feb22 £0.40 24% Orchard Funding7.6.21 £0.568 6p £0.415 -16% Caffyns22.6.21 £4.65 30p £5.25 19% Highcroft22.7.21 £8.75 78p £9.10 13% Town Centre Securities10.8.21 £1.426 1.75p Sold Feb22 £1.581 12% AVERAGE 27%Bought more Orchard Funding 7.12.22 at 48p The return reversal portfolio Purchase date Purchase price Divs to 31 Mar 2023 Price 31 Mar 2023 Return to 31 Mar 2023 Havelock Europa20.5.15 £0.14609 zero Sold Dec 2016 £0.0915 -37% AVERAGE -37%Brief description of criteria for the portfolios Shares are allocated to portfolios designed around ideas flowing from research conducted when my PhD students and I asked the question “what works in investment?” These investigations were often inspired by the ideas of great investors such as Benjamin Graham. More detail on these ideas is presented in earlier posts (if you put key words into the search box those Newsletters will appear). Net current asset value, NCAV, criteria
Return reversal
Perhaps you think the answer is ultra-high intelligence?
Or extensive memory, or mathematical acuity? Or great knowledge of accounting, or economics, or corporate strategy? All wrong. All the maths you need for sound investment you learned by the time you were 10 – if you were paying attention! Peter Lynch observed: “People who have been trained to rigidly quantify everything have a big disadvantage….All the Math you need in the stock market….(Chrysler’s got $1 billion in cash, $500 million in long-term debt, etc.) you get in the fourth grade. Logic is the subject that’s helped me the most in picking shares, if only because it taught me to identify the peculiar illogic of Wall Street” The best investors are not those with very high intelligence – they often end up frustrated and disillusioned by the sheer stupidity that they witness in the markets, when share punters do not do the smart thing. Lynch put it this way: “In terms of IQ, probably the best investors fall somewhere above the bottom ten percent, but also below the top three percent. The true geniuses, it seems to me, get too enamored of theoretical cogitations and are forever betrayed by the actual behavior of stocks, which is more simple-minded than they can imagine. It’s also important to be able to make decisions without complete or perfect information. Things are almost never clear on Wall Street, or when they are, then it’s too late to profit from them”. Less than perfect memory can be made-up for by keeping extensive notes. Personally, I write long reports on a company before my initial investment. Subsequently, I update the report as results come out. The report for the company I’m currently working on runs to 37 pages (12,000 words) so far; it’ll be a few more pages by the time I’ve finished. I’ve already put in about 100 hours for this company and a visit to chat with the directors (unfortunately it’s not one I can tell you about because at Henry Spain we are building up a substantial stake for clients, and it’s a small company so we don’t want additional demand for its shares right now). When it comes to knowledge of accounting, economics and corporate strategy – well, of course, you need to understand these subjects to a decent level, but, then, you wouldn’t be an investor if you didn’t already take an interest in these subject areas, would you? Surely, you are fascinated by alternative business models, by the numbers describing the progress of a business you might put your life savings into and by the economic environment impacting the firm? If you’re not interested in these subjects – and many people live happy and fulfilled lives without venturing here, they make very important contributions to society – then perhaps you shouldn’t be investing for yourself. After all, would you go for DIY appendectomy or dental treatment or instead avail yourself of the services of someone with real focus and skill in these areas? So, what quality HAS helped investors most? Charlie Munger: “That’s easy — rationality. If you’re just not crazy, you have a big advantage over 95% of the people. Most people have all kinds of crazy patches. If you’re just consistently not crazy, you get a big advantage in life. If you’re patient and a gratification-deferrer, in addition to being not crazy, then it’s practically a cinch. It’s so simple. Why don’t more people do it? It’s an interesting question. I don’t think you can educate your children to do it automatically. If you have ten children, you’ll have some that are a lot better than others at doing this.” Benjamin Graham, the father of value investing, said: “The investor’s chief problem - and even his worst enemy - is likely to be himself....We have seen much more money made and kept by ‘ordinary people’ who were temperamentally well suited for the investment process than by those who lacked this quality, even though they had extensive knowledge of finance, accounting and stock market lore” Is it harder with success, age, wealth to hold onto rationality? Charlie Munger, at 99 said: “It’s always hard, but you get better at it if you get good at it young and keep practicing. But it’s never easy.” Warren Buffett agrees that rationality is at the core: “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher 5, 10 or 20 years from now.” (Chairman’s letter to Berkshire Hathaway shareholders 1996) Be as objective as you can be in judging how the world works: “Recognise and adapt to the true nature of the world around you: don’t expect it to adapt to you.” (Charles Munger) Do not allow optimism to blind you to the downside and then overpay “It is optimism that is the enemy of the rational buyer.” (Warren Buffett, B.H. 1990) On the flip side of that: do not let irrational pessimism prevent you from picking up bargains. It’s not easy being an investor, but it is a fun intellectual pursuit, so who wants it too easy? If it was easy, everyone could do it well and then the fun goes out of it as the bargains disappear. Prof Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to [email protected]) |
Glen ArnoldI'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact [email protected] investing is about making the right decisions, not many decisions.
Categories
All
Archives
May 2023
|