Sunday, January 21, 2024
On A Better Year
Sunday, January 22, 2023
On Maintaining a Consistent Strategy
2022 was a year that many stock market participants may wish to forget. Having (effectively) predicted at the start of the year that deflationary forces would subdue any inflationary pressures that may arise, I found (along with many others), that this was not to be. Apparently a long period of easy money followed by a shorter period of even easier money (whilst outlets for spending were significantly curtailed!) combined with significant supply chain disruptions will trigger the sleeping forces of inflation.
In actual fact inflationary pressures from easy money have been putting upwards pressure on asset prices (and services for the well off, such as school fees) for many a year, but the price levels targeted by Central Banks (those of broadly used goods and services) hadn't seen any upwards pressure for such a long time that lending rates remained extremely low.
That period had to end at some point and it seems that 2022 was the year that it finally did end. The result was carnage across equities which really had no substantial earnings in the first place and were trading on multiples of projected profits that were more hoped for than truly expected. I got caught up in one of these 'story stocks', it seems, in the case of Naked Wines. Whilst it's annoying to look back on a poor investment decision it does highlight the need to maintain a consistent investment strategy, even if that strategy doesn't work for a long stretch.
My preference has generally been to find shares in businesses selling at high free cash flow yields. 14% is a level of yield which feels about right for a true bargain opportunity. However, as time has passed, the reality has sunk in that 'value investing' runs the risk of owning marginal businesses on the decline. More importantly it generally means missing out on what now feels to me like the real bargains available to stock market investors - owning compounders.
Back to Munger (as is so often the case): “A great business at a fair price is superior to a fair business at a great price.” As I can attest to the veracity of this through many an example by now, a high free cash flow yield does not always work out well as in investment/speculation. But owning great businesses usually does. There may be a short-term exceptions to this rule (short-term being somewhat meaningless in the attempt to compound capital over time), and that is when you own great businesses at high multiples of earnings, as was the case for many at the start of 2022.
Well, back to the portfolio. My top two holdings at the start of the year were Plus500 and Berkshire Hathaway. These made up more than 50% of the total holdings and both rose over the year (the latter due more to currency effects than the share price movement). The other four positions fared less well with Facebook (now Meta Platforms) and Naked Wines being the most injurious.
Energy won the year (assuming the market segments were in some sort of a competition); consumer staples made it through without too much pain; UK Homebuilders, Tech and Online Retail saw significant share price deflation as the cost of seemingly everything else rose over the year.
The portfolio fell, annoyingly, for the third year of the past 18. The result was -6.2% against +4.7% for the FTSE 100 and -18.1% for the S&P 500 (with dividends included). The first two of these are in pounds, so would be around 10% lower if measured in US dollars (making the portfolio's return only slightly better than the S&P).
Whilst disappointing - and even moreso as the three negative years were all within the past five - my hope is that I can be more consistent in my strategy in the future. The goal is to find compounders. This clearly needs work as I remain drawn to what may be broadly termed value, or special, situations. They're fun when they work but all too often they just do not work out as planned.
Holdings as at 20 January 2023: Plus500 33%, Berkshire Hathaway 26%, Admiral 18%, Vistry 11%, Green Brick Partners 8%, Meta Platforms 4%
Thursday, January 6, 2022
On Seeking Out Compounders
Wednesday, March 31, 2021
On Market Dislocations
Friday, January 10, 2020
On Speculation vs Investment
Thursday, January 31, 2019
On Market Timing
Sunday, January 28, 2018
On Investment vs Speculation
Using the Buffett fee model (no fees on the first 6% gain, 25% of gains above this paid as performance fees), a 20% underlying asset growth would translate to 16.5% gains after fees. Over 20 years of compounding this would generate profits on a £1m investment of £20m; an enormous sum vs expected returns on most equity funds. Perhaps this could be the plan, with 20% gross gains targeted over 20 years, starting in 2020. As at 28 January 2018, the portfolio has grown at an annualised rate of 29% over three years and 33% over five years, so even with less concentration, the idea of a 20% annualised gains doesn’t seem so far fetched.