A New Dawn

The sun gradually pushed out a soft light across the dewy hills. As the shadows appeared, our protagonist stirred and shifted, awaking from a deep and restful slumber. To the east a ball of light hinted at its imminent arrival, haloed over the jagged peaks, spreading it's rays over the upper sky. Slowly, but steadily, the ball arose and the rays fell, in perfect harmony. Light shone on the investor who had been roused by the appearance of daybreak. A new day had arrived, and he intended to live it to the full.

Whatever has happened is in the past, and all you can do is look to making your future as bright as possible. I've always known that my future is as an investor and not a trader, so it's with some disappointment that I reflect on the past few years of excessive trading activity, where capital has been created and destroyed. But underneath the gross volatility of my trading activities I have been developing a knowledge and skill base that I am increasingly certain is one that will significantly outperform over time.

It's all about Value, it always has been and it always will be. But my investing hasn't always been intelligent. To have almost proved the maxim that with a bit of capital and a high IQ you can lose a great deal very fast isn't perhaps an achievement I need to reflect on too deeply (or indeed share too often), but I have to admit to my mistakes and learn from them. Perhaps slowly, but I have to learn.

So, out with the currency trading, out with bond futures, out with options, commodities trades and the like and out with equity index punts. In with VALUE INVESTING. The way it should be and the way it needs to be.

It will be a gradual shift, but the portfolio is formed now and I've finally made the analysis of my performance that I had meant to do for a long while. In short I've made 55.4% since March 2005 versus the FTSE being flat and the S+P down 12%. Not too shabby. The annualised return is 10.0% since March 2005, which I can live with. And here are the current stars of the portfolio...

1) Berkshire Hathaway (BRK.B) - 20%

The one and only. After the analysis is done I have this as a 25% discount to fair value, so a potential 33% upside if it achieves that fair value in the near future. But the return on equity from this fantastically well capitalised business is a not stellar 6.6%, although probably over 10% on a normalised basis (excluding 2008 losses on stocks and derivatives). 10% on $109bn - not bad, sir! Once the only stock in here, now maybe on its way out, think it will have to go if the discount narrows to 10% or so.

Everything from Insurance to t-shirts and prefabricated houses. A holding company for a fantastic collection of 100% owned businesses and shares in fantastic publicly traded companies, bought either at fair prices or a discount to fair prices. Over time this business will grow and grow and continue to produce prodigious amounts of cash. Succession risk prevents the stock from shooting upwards, but it has an excellent returns to sleep ratio to it!

2) Hallin Marine Subsea International (HMS) - 14%

My best idea currently. According to my estimates, this company is trading at a 51% discount to its fair value. It returned 65% on equity last year and is on a P/E of 2.65x last year's earnings despite a 30% run up in the stock prior to tomorrow's earnings announcements.

The more I think about the business, the more I like it. A great management team providing excellent service to a sector with lots of cash available doing things that are difficult to do and winning new business at a steady pace.

HMS provides subsea intervention equipment and teams to the oil and gas and telecommunications industries. A lot of their revenue is earned out of their Singaporean hub, where the economy is on a much sounder footing than here in Europe. Growth at the profits line has been 120% annualised over the past 4 years... yes, annualised! They have managed this by starting out small, but they are still pretty miniscule at a market cap of £56m - although I expect that will change markedly over the next few months.

3) Man Group (EMG) - 12%

An association with the Head of Research of AHL (the futures trading arm of the hedge fund group) first introduced me to this company. In an industry in turmoil and in need of consolidation, I believe these guys have what it takes to come out not only in one piece, but shining.

I have them at a not-quite-enough-to-be-buying-here 22% discount to fair value. But they are yielding 9% on a well covered dividend. That's 9% from what I regard as a solid business when I can get around 1% in a bank. Returns on Equity are over 10% still based on last year's earnings, which look unlikely to be repeated for a good while yet, but even with normalised earnings of a little under $1bn per year the stock's market cap of $8.4bn isn't what I would regard as expensive for what I do regard as a business with a good future.

When to sell will be a dilemma, but I think with such tiny sums of capital to invest at the moment it will be a case of finding new ideas to invest in before selling ideas that still show up as value investments in my mind.

For completeness, here are the other protagonists in my motley crew of investments. In order of the value within the portfolio...

4) Interior Services Group (ISG) - 12%

5) Matchtech (MTEC) - 12%

6) William Hill (WMH) - 7%

7) Game Group (GMG) - 7%

8) Lo-Q (LOQ) - 6%

9) Umeco (UMC) - 5%

10) Severfield Rowen (SFR) - 4%

11) Staffline (STAF) - 2%

The one idea that I am least happy with is Umeco, and may sell out of this stock soon enough. They provide supply chain outsourcing to the aerospace and defense markets (unexciting) and also manufacture composite materials for airlines, wind turbine blades and Formula 1 teams (exciting). But margins aren't all that wonderful and the return on equity is around 8.5% versus 20%+ in most of my other holdings with the exception of Man Group and Berkshire Hathaway.

At least it is up 20% on where I bought it less than a month ago (the market has been strong this Autumn), so the discount has narrowed and the reasons for buying the stock have diminished somewhat. That leaves a question of what to do with the funds once the stock has been sold. There's not much bad news knocking about in my favourite stocks, so I'll probably add to the holdings in Lo-Q, which could be a fantastic investment, but it's hard to see if the business model is truly sustainable.

So, a new dawn has arisen in this investors outlook. I'm going back to London for work, but my heart will stay in the mountains. And my dreams of running a fund are still in tact, as you can probably see from the above. The counter on this blog has been ticking upwards recently, and I'm not sure exactly who is reading this, so if you have anything to add, please comment below and be as open as possible. Feel free to spread the word if you find anything useful here also - anyone buying my investments will only push the prices up and I'm pretty much fully invested now, so that's ok with me!

The true test starts now though, as my portfolio did not fully exemplify my value philosophy before the recent additions in August. I'm very pleased to have made such good returns in the past, but really it's 20% a year in good years and to not lose too much in bad years that I'm shooting for. Then again, with 2008 such a disaster for most investors, I think I have the right to feel pretty good about a 50% plus gain over a period when the FTSE has ended up where it started.