On Turning Pro

Um, it’s all gone slightly insane in portfolio-land. I’m up 26.5% this year and it’s only the end of March. The total cumulative performance is 129.9% since inception (17.9% annualised), and 80.8% since the end of March 2009. For comparison, the FTSE 100 with dividends reinvested is up 39.6% (6.8% annualised) since the same start date (10 March 2005) and is up 50.7% since the end of March 2009.

Well, maybe I’m due a ‘correction’, or maybe value investing with a concentrated portfolio of undervalued securities is a smart way to compound capital. The great thing about blogging for the past 16 months is that it records some of the thoughts going through my head during the period, thus avoiding the perrenial problems of hindsight bias.

A few further statistics worth noting are that of the 16 securities I owned over the period, just 9 were sold for, or are currently showing, a profit. Of the total monetary gains, 91% have come from 3 securities (32% Berkshire, 17% Hallin Marine and 42% Lo-Q). The maximum percentage loss was a 49% loss in RBS, but this only comprised 2% of the total P/L over the period. When I really liked something I bet big and when I wasn’t sure I bet small.

In a world of mixed fortunes I’m now working as a professional again, 7 years after first starting out as an Equity Analyst but with over a 5 year gap during the period. I feel pretty much self-taught, although working at a small fund a while ago certainly taught me a lot about investing in general and investing in the stock market in particular. I wonder how much use the leveraged global-macro betting was in coming to terms with my fallibility, a lot I suspect. It also taught me a great deal about how markets react to news and the various capital flows that ebb and flow over the credit cycle.

Whilst it’s great to be working again, I can’t just buy and sell for my own account as I might like to any more. I also have a lot less time to look at small-cap shares as I’m spending it looking at larger stocks at work. I’m learning a great deal from some guys with loads more experience than I have, and the game has changed somewhat as the size of shares to look at has grown.

Whilst I can simply read a set of financial statements and feel I have an edge on other market participants with the smaller £10m or so companies, it’s going to take an awful lot more work to feel like I have an edge (most of the time) while looking at £500m and upwards companies. Suddenly the market is far more efficient and effectively smarter. This is not all bad, as reasons for a re-rating should be uncovered faster, but the ultimate goal of maximising post-tax returns is simply a lot harder when investing tens of millions over tens of thousands of pounds.

By way of completion, I did say I’d post my portfolio up here with prices and so on. It’s moved around a bit since I said that but the current situation is as follows:

Stock........Price Paid......Current Price........% Value in Portfolio
LOQ.............£0.80.................£1.21..............................59%
MTEC..........£2.03................£2.22..............................17%
EMG............£2.05................£2.42................................7%
WMH...........£1.62.................£2.11................................4%
GMG.............£1.57................£0.98...............................2%
(Cash)...........................................................................11%

If I were starting from scratch I may have similar holdings, but weighted something along the lines of 50/20/10/10/10 (%-weight in the order of stocks listed above). In fact, Lo-Q isn’t looking quite so attractive any more as the price has risen, although it’s still reasonably cheap and my other ideas for inclusion aren’t so great or developed at the moment, so there’s no need to sell just yet.

As a final note, I’m happy to think that you can still pick up the odd bargain in the mid-cap pool of stocks. Game Group is a great business; the market leader in its niche in almost all its territories. The earnings are strongly cyclical, and Myopic Mr Market has some trouble looking more than 12 months ahead, so it’s selling at around a 60% discount to its fair value. I could well be wrong on this, as the world of tomorrow won’t look like the world of yesterday, but at least I feel I have a Variant Perception. Hopefully they’ll be dishing out some more profit warnings soon and the market will become even more depressed and the bargain even more attractively priced for all the long-term value investors out there.