The advantages of having a small amount of capital and no outside investors that could pull their funds from you are huge versus the constraints within the professionally managed funds universe, but I still don't think all that many people could manage over 20% for 10 years - which will be the outcome if there are no shocks in the next 10 weeks. But enough bragging (except for maybe a cheeky chart at the end), on to stocks...
One source of frustration in 2014 was a mistake of omission. After 5 years of waiting for AHL (the quantitative funds within Man Group) to perform, I eventually gave up in 2013 on the basis that it was something that could not be analysed or known. Whilst this was true, there was nothing in the share price to account for the option value of AHL generating a return. Then, finally, the fund was up 34% in 2014 and the stock up 103% (including dividends) as a result. So, solid analysis, an outcome that eventually matched my expectations, and an overall loss of 7% over a 5 year period. One more episode to deposit in the bank of experience.
With the above in mind, one purpose of having a record of choices made is that it can serve as a reminder as to why a stock was selected in the first place. If you don't remember why you bought something, it's very hard to work out when to sell it. So, on to three new ideas added during 2014 which may also take patience to play out as expected.
The first is what may be termed a 'growth' stock. The name is Sinclair IS Pharma and the firm manufactures a variety of skin care and aesthetics products that are distributed globally. The products seem to have a bright future, and the firm has both operational and financial gearing, so currently small losses will translate into exceptional earnings growth should the products succeed in the marketplace. My concerns are that various milestone payments mean that actual cash profits will likely be absent for the next few years and the corporate strategy seems to be more about a private sale than generating cash profits. Perhaps it's a multi-bagger, but I do wonder if I shouldn't stick to owning businesses that make decent profits selling at low multiples with profits highly likely to rise over time.
The second is what may be termed a 'value' stock. The firm is Ferrexpo and a simple glance at the past financial statements shows a business with a market cap of $479m with peak profits in 2011 of $568m. Earnings at present are likely to be near zero as their cash costs of production (of iron ore and iron ore pellets) at $70/tonne are around the same as the current realised prices for such products. Iron ore prices have halved in the past year as China switches from a fixed investment economy to one more geared towards consumer-lead growth. I wouldn't say that I have any special insights into future iron ore prices - if anything I expect that they will stay low for a long while - but the firm is likely to stay solvent and earn around $100-200m through the cycle, at a very rough estimate. So I'm paying around 3x earnings for a business that should still be around decades from now. Then again, the political situation in the region (the mines are located in Eastern Ukraine) is not so stable and I do worry about assets being seized one day, and rising taxes on profits, so I don't think I'll be investing too aggressively in this one.
The third stock that I invested in during 2014 is actually the largest company in the world now. I was kicking myself for a while for not buying shares in Apple after seeing David Einhorn speak on the matter in 2012, but eventually bought a few during 2014. Having developed iCancer myself (a disease where new Apple products keep getting purchased somehow), I understood their appeal and the extremely tough job competitors will have to dislodge them for a good few years. Their margins and returns are astonishing, and they still manage to grow sales despite a massive base to build upon. A watch is coming out in 2015, which may or may not be a success, but the phones are the bulk of profits and their latest set are selling well, so no reason to sell the shares just yet. I do feel I should be able to do better, but this investment has been profitable so far at least.
Ultimately, investing is about paying less than you think something is worth, and then sometimes waiting and waiting and waiting. Speculators may look for shifting sentiment towards securities for their sources of return, and investors will look for dividend income and earnings growth to justify the allocation of capital to an idea. Both seek to generate positive returns. Investing seems to really be about finding wonderful businesses that you understand, paying reasonable prices to own a part of the business, and then hanging on to them for a long, long time. I suppose my approach has mixed speculation (looking for changes in sentiment to generate returns), with investment (looking for dividends and earnings growth to generate returns). Both can work, and finding multiple ways to win seems to be working out reasonably well for me so far.
Whilst it is very easy to describe investing wisely, those pesky human foibles exist that prevent cogent decision making. As a result, finding, analysing, investing in and then holding on to good ideas for a long period of time is really not that easy. It's only by delving in and trying that anyone can really learn if they are good at the activity of investing or not. I can attest with 10+ years of experience now that it is definitely not easy, but something tells me I'm gradually getting the hang of it.
Stock.......Price Paid......Current Price.....% Value in Portfolio
GVC............£1.54.................£4.81.......................64%
SPH............£0.30................£0.35.......................17%
FXPO.........£0.50................£0.53.........................6%
LRE............£6.58................£5.60.........................5%
AAPL........£50.36...............£71.46........................5%
DL............£14.39................£14.15........................3%
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