Tuesday, January 3, 2012

Diary: Portfolio review

Another year older, but not necessarily another year wiser. In a year when the Footise dropped 5.6%, my portfolio performance needed much to be desired. I haven't been able to get a final tally on my result, believe it or not, but I'm somewhere down around 8%, although that might be 12% on an IRR basis, and  down more on just my stock picks - my OEICs are mixed in with that return figure. I wont get a proper picture until I've finished my Fortran program to get a rate of return that is of more use to me. It looks, though, that my stockpicking has been "lacklustre", to put it kindly.

I don't want to go through a blow-by-blow affair with every investment, that will be too long and boring. So I'll just try to stick to some general observations.

I think the first one is that I over-traded, and own too many stocks. The stocks that did well were the good-quality companies, and the stocks that did badly were the more dubious companies.

The most insightful thing I did in 2011 was dump Aviva and Barclays near the beginning of the year. I started 2011 with heavy bets in both. Around about March/April time I figured that the markets were a bit toppy, and that I was heavily exposed to financials, which could cost me a packet if things turned sour. With hindsight, this turned out to be an amazingly prescient call. I sold out pretty much at the top, and watched them take a major drubbing in the market thereafter. I saved myself an absolute packet with that call, and if I hadn't made the move that I did, I would have taken a much bigger hit.

As regards the least insightful thing I did, I'm not sure I could say. "Everything else" might be the best I can manage by way of explanation. I did buy Aviva and Lloyds later in the year - so far, it's not working out. My exposure is very much reduced from what it was at the beginning of the year, so I am much more comfortable with the risks involved.

My best idea. I think there are two. My decision to hold onto BATS (Brit Amer Tobacco) was sound - it's up 24% in 2011, and has been thrashing the market since I bought it. Plus I've had high and rising dividends since purchase. The growth in dividends has been high, too. My greatest purchase was in CTN (Clearstream Tech) - a small company in the stent market that appeared to me on the cusp of great growth. I copied the idea from a post on TMF - which shows that you don't have to be original, you just have to recognise a good idea for what it is. I think Buffett said as much himself - just use the best ideas of others. CTN went down a lot in price over the course of the year, along with the rest of the stock market. I had figured that its story was unchanged, and used the stock market decline as an opportunity to top up. This turned out to be exactly the right thing to do. CTN was taken over during the year, allowing me to book a healthy profit. I purchase the shares in two separate accounts, so I can't quite gauge the exact return I obtained from it. I can tell that it's "a lot", though.

My worst idea? Oh boy, let's just restrict that to one. FCCN (French Connection) was a bad idea on my part. I bought in at 103p in April, on account of the large cash position and improved trading statement. Things went downhill for FCCN since then, and I decided to sell in November at 51p. Trading had declined. It currently stands at 37.5p. I am aware that there's some very good private investors buying at around the 50p mark, so it could be that I have made a faulty buy decision, and a faulty sell decision. What FCCN has going for it is the healthy cash position - so it provides for considerable safety on that front. I see that FCCN now stands as a net-net, so it may be worth rethinking that one. It would be well worth checking the operating lease obligations, though, as that might materially affect one's assessment of whether it's a true net-net. One of the problems with FCCN is that it has has the thinnest of the thin operating profit margins. In its latest interims, it had negative net cash flow. It seems to have severe difficulties making any headway. Whether it can recapture its former glory is an open question. It's got its wholesale operation which seems to be doing well. I think its business in America must be in flux at the moment, as it supplies Sears, which is having difficulties of its own.

If I could sum it up in a single sentence: 2011 would have been better for me if I had less trades, fewer shares, in good solid companies with reasonable growth prospects, and had steered clear of the junkier stuff.

2012 should be interesting. Many value investors have taken a bath last year, so maybe 2012 will be its comeback year. I honestly don't know. It's all 50:50. There's a lot of fear in the market at the moment, with lots of talk of recessions, government debt, and the Euro crisis. The question is: how much of what we think will be bad news is priced in to what will actually happen? Maybe 2012 wont be a bad year for many companies at all. Some of them seem to be doing quite well, actually. We'll only know for sure at the end of the year.

I think 2012 will be a year in which I dedicate a lot more time to learn about investing. I've spotted some great resources that I hope to learn from. I shall hopefully use 2012 as a "sitting out" year, and look to buy quality companies at reasonable prices where I think that there is room for growth and nice dividends. I'm going to try to avoid all that value stuff for awhile, even though I accept that 2012 could be a great year for value.


John Kingham said...

Tough year. I haven't looked at my actual pension but my model portfolio is down about 7% since March when it started compared to the benchmark down 3.5%. That doesn't bother me in the slightest though, or at least I pretend it doesn't.

As for French Connection, I always thought it was rubbish. I just look at it as a net-net so whenever it pops up as one I get interested.

It can't sensibly be worth more than 100p... there's zero nominal growth (i.e. real shrinkage) and the dividend reached 5p in the boom years.

And that cash pile is crazy. Give it to the shareholders so they can do something useful with it!!! Pay a special 10p or 20p dividend and let then reinvest it somewhere that it has a chance of growing.

However, I do own one of their shirts and it's pretty good, so perhaps there's hope for them yet.

Happy new year Mark

Richard Beddard said...

Good review Mark. I had a similar year in that I can thank good fortune for getting me out of some dodgy companies, and regret staying with others. In retrospect the dodgy companies did drag the portfolio down but the problem is they didn't necessarily look that dodgy at the time! Maybe because I got it wrong or maybe because they were flattering to deceive with a brief but short-lived recovery.

That's why I'd question owning fewer companies. If you hold only a few companies you must actually get it right every time. That's hugely ambitious.

On French Connection I don't think margins matter much when if it's genuinely a net net - inevitably profits will be under pressure it's what gives us the opportunity to buy so cheaply.

The worry is the leases. a liability that is not accounted for in the net-net calculation. In other words, account for them and it's not a genuine net-net.

That means margins are important after all - and must recover (unless FCCN can get rid of the leases, which doesn't currently appear to be on the agenda), which makes it a much more speculative stock than its net-net status implies.

Anonymous said...

I think that I did ok considering a few small cap divestments in 2011. I started a longer term solid dividend paying company portfolio on the 20th January ( first purchase Tesco at sub 400p ). Since then I added more Tesco, Munich Re, RB and REE ( Red Electrica ). I also held Wells Fargo but that has since been disposed.

My largest holding is Tesco which I bought all the way down to 354p in an inverse pyramid fashion. ie spending greater amounts of cash on the way down. The shares bought before April have returned 2 dividends ( final & interim ) and the shares bought after April bought in the recent interim dividend.

Oh I also bought JCR on the delisting news at 15.5p and that yields over 12% now. A bit illiquid but I think of it as a perpetual bond. Something will happen there within the next 5 years imo but as always with cheap stocks its a waiting game.

My net nets are at about break even but since I am based in Euro land I have a nice little forex gain.

Currently I am researching more net nets to buy but I am in no hurry.

Let the markets fall. :O)