On 10 Years of Investing

Today marks 10 years from inception in the portfolio and I thought I'd use it to record some thoughts on, broadly, what works and what doesn't. First off is performance - the output - and the record shows a 725% gain in 10 years, or 23.5% annualised against 6.5% annualised for the FTSE 100 and 7.6% for the S+P 500 (with dividends). Of 28 investments made, 15 have been profitable with 2 making over 100% gains and two making between 50 and 100% gains. 95% of cash profits came from just two investments - LOQ and GVC Holdings. In essence, the excess returns came from taking large positions on illiquid holdings that were under-researched and misunderstood.

Warren Buffett summarises investing (which I contrasted with speculation in the last post) rather eloquently. This direct quote sums up the best way to compound money at a decent rate over a long period of time: "Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earning’s are virtually certain to be materially higher, five, ten and twenty years from now. Overtime, you will find only a few companies that meet those standards – so when you see one that qualifies, you should buy a meaningful amount of stock."

The above is really something that you can remind yourself of time and again. The amount of patience needed to just sit there holding on to shares in wonderful businesses is a vanishingly rare skill (and one that is hard to recognise in others, and even harder to practice in a professional investing role). I wish I could say that I find it easy, but the truth is that in an environment filled with daily news, second-by-second price quotations and populated by well spoken men (they are almost always men) with convincing stories about which way a price will move next (therefore providing easy-wins), it is harder still to stay true to the above goals.

As for my future as an investor, I have to admit that even with limited trading activity in my portfolio, I find thinking about it a distraction from my work, which at the moment is paying the bills and providing the foundations for potentially starting a family (a position fairly far removed from the first blog post in December 2008 when I moved to Chamonix on my own). My job at the moment is to provide investors with plausible stories on why they should act. What they should do is listen to Buffett and sit on part-ownership stakes in wonderful businesses. But what a person should do and what they actually do are not always the same thing. As a stockbroker my job is to feed their hunger for ideas/action with investment analysis packaged into a neat stories for bite-sized consumption.

Perhaps I'll switch to an investment role soon, and try my best to apply the skills I've learned and create an environment where my patience can be tested on the coalface of a professional investment mandate. I realise 20% a year is vanishingly difficult in an institutional world, but I do hope that if I'm given the chance, I'll be able to generate returns that are at least in excess of those of a passive index tracker over a long period of time. The power of compounding is still somewhat compelling with 7% annualised returns, whilst it becomes absolutely startling with 23.5% annualised returns (7% doubles your money in 10 years, 23.5% takes it up 8-fold over the same period).

To drill in the above point of Buffett's, and to point out the chief mistake of most investors is the same thing. To have startling returns you don't buy something at 10% or 20% less than it's worth, you buy it for 50% less than it's worth. It's just that simple. Holding cash at the moment is probably the best strategy as there's little obvious value out there and confidence is relatively high versus the past few years. And this is where the patience comes in. The confidence that something will come along eventually that is materially mispriced is what you need in order to hold cash and forgo the last few percentage points of the bull-market's gains.

Nobody can time markets, but everyone who is worth their salt can tell if a stock is compellingly cheap or not. If there's nothing to do, do nothing. Only professional investors are required to remain fully invested at all times. For the private holders of wealth, who can act in a contrarian manner, cash can be a wonderful investment as it offers the holder the option to pay what may be compellingly lower prices in the future for a given stock. And when dealing with a manic depressive business partner (an apt description of Graham's 'Mr Market'), it will often pay to wait for a bout of depressive behaviour before parting with cash for a part-share in the many wonderful businesses for which he quotes prices daily.

It may be that this is the last post here, given I really should focus more on paid sources of income, and less on compounding returns on just my own capital (as fun as the outcomes of the latter when it works may be). I hope that anyone reading this will have a sense that it is not impossible to beat markets over time, but also that an investor's chief enemy in doing so will, in fact, be themselves. Human beings have brains so well adapted to running and hunting in the savannah that they have trouble with the complexities of investment analysis and staying rational where money and risk (and therefore emotions) come to the fore.

The one certainty an investor (even one who is doing it right) can have is that they will make mistakes. But for those who persevere with it anyway (probably because they love the process and the constant sources of opportunities to learn and improve) the rewards - both material and psychic - come highly recommended.

3 months in

What to make of the picture three months on? Perspectives have been altered and the reality has not quite met with expectations. Emotions have waxed and waned with the markets and days out in the hills. A trip back to life as I knew it, perhaps 'reality' as I will come to know it again soon enough, gave the perspectives that I sorely needed on how different life out here is, and how different life back in London would be too.

And the confusing part is that neither is necessarily an obvious choice as being better or worse than the other.

In simple terms it is very easy to see that a life involving many days in the mountains would be far more easily served with a relocation to somewhere an hour or so from the great peaks and vistas that surround me daily here in Chamonix. But equally what has been left behind isn't all bad. The relationships built over 6 years in London have become important to me. The lives of people I've come to know well are ones in which I wish to share time with in the future. This does not obviate an extended trip away from London life, or even a move completely away from it, but it does mean that something has been left behind that would not be so bad to return to - the proximity of people that I care about.

And then there's the question of how I am to earn a crust in the future.

Ay, there's the rub, for in that sleep what dreams may come. And in Chamonix, dreams of a life with more varied stimulation than mountains and mountain people is permeating my thoughts. What of all the other great things that life has to offer? The people and places that add spice and richness to life's possibilities. And the personal growth that comes from seeking to become something that you are not currently ready for. Whilst this feeling can be nourished in mountain life, the unfortunate reality is that a price often paid for excellence in the mountains is a relative poverty outside of them.

When speaking of poverty, I do not mean to imply that people who dedicate their lives to mountains are impoverished. I would rather indulge in a love of mountains than fill out my days in a grey office repeating essentially the same actions day in and day out. The poverty lies, as will all focussed pursuits, in that all other aspects that life has to offer are necessarily subjugated to the over-riding aim. For the pluralist, this is a sacrifice too far. And the personal growth that can come from work is sorely lacking in my life out here. Sadly, it will remain so if I do not add direction and resolve to my daily activities.

Another unfortunate reality that is setting in is that it is going to be rather difficult to convince potential investors to entrust their savings to a man with a track record that does not exactly scream of 'high probability' investments made for the long term. And why should they? I do not believe in myself enough to commit 100% of my capital to my long-term ideas, partly as the timing of my next form of income is highly uncertain and my outlook generally still bearish. This love of mountains is not taking me where I want to get to in terms of my future as a great investor and therein lies the rub.

A few years ago, aged 22, I commented that I would like to make half a million pounds and start a hedge fund by 26. Later this was revised to 36 (as events collided with reality)! The path set out on once I'd revised the timings was to work in a bank as a research analyst, make a name for myself, work as a junior in a hedge fund, get a track record and then set up on my own. The first step, to work in a bank, wasn't too appealing as I knew that time in the mountains would be massively curtailed, so instead I worked as an auditor. This nulled any sense of wanting to work ever again in a similar corporation, but bought me time to get over health problems and create a foundation for future success.

The last 3 months has opened my eyes to how life is out here in Chamonix, and how it could be living nearby in Gevena, or Lausanne. My climbing dreams are still with me, but the balance of life has perhaps swung too far over to the mountain side, and away from the longer term investment management dreams. For sure I'm still passionate about spending time in the mountains, and will continue to aim to do so whenever possible, but the sad reality is that I need to subjugate this to time spent building a reputation, a track record and an array of investing skills and contacts in order to become the investor that I know I have the potential to be.

All of life's choices negate the options and paths not travelled. Each journey takes us to crossroads and turning back is never an option. All you can do is make a decision and enjoy the journey as well as possible. There is no right and wrong when complex decisions arise, but there is often a sense of compromise. And where long-term goals are firmly embedded, it currently seems that taking the high-probability trade to get to where you're going, not necessarily as fast as possible, makes the most sense. But, sad to say, a life less ordinary it is not.