Tomorrow, And Tomorrow, And Tomorrow

One of my favourite stock market quotes comes from the great American Financier (or robber barron, depending on your view) - J.P. Morgan. When asked what the stockmarket will do next, he responded that, "It will fluctuate." And that is about the most prescient answer anyone could ever give on the subject.

Anyway, investing isn't about peering into a crystal ball and seeing what will be. It's a search for opportunities where, on balance, the likely reward of an investment outweighs the potential risks. You can concentrate your risk in a few high-potential investments, or spread it over more ideas that collectively should give you less volatile returns. All this balancing of risks and rewards is a tricky business. This past week or two being a case in point.

One of my favourite stocks at the moment is a little minnow that I now have a reasonable amount of shares in called Lo-Q (ticker LOQ). From looking at the annual report, reading information on the internet, reading the available broker note, talking about the business with friends, thinking about the business lots and finally speaking to the founder on the phone recently, I have formed a strong view on the likely fair value of the business. And my valuation (around £40m) was just a little bit higher than the market cap of the company as quoted on AIM last week. Just a little bit being £30m higher (or a potential 300% rise from the current £10m market cap)!

Back in October I sold out of two business I thought it wasn't worth being in - Umeco and Severfield Rowen. They both seemed undervalued still but my other ideas just seemed better. Plus I was starting to really understand the concept that it's hard to think about more than, say, 6 ideas at once as I was having trouble thinking very deeply about the 11 ideas I had in my portfolio at the time. So I sold out of those two stocks in favour of Lo-Q and Staffline (ticker STAF).

Of course Umeco promptly rallied from 290p to 350p, which just reminds me (again) that my short-term market timing skills are rubbish to say the least. In consolation Staffline managed a 42% rally in November, which was nice.

So this LOQ then. At the end of the analysis I just saw a great, growth business with relatively few issues to derail growth over the next couple of years at least. And at 75% undervalued, a fairly compelling prospect. What to do. Hmm. I thought about selling out of the larger issues I have that are less undervalued (BRK.B at 20% and EMG now at 40%). Probably a good idea, but that's not how a balanced portfolio would look. And there's the rub.

If I'm managing this mini-portfolio with a view to showing others how I would manage their money one day that's one thing (and being somewhat diversified to reduce volatility and avoid potential value traps makes good sense). However, it is a little different to what I should be doing if I were just managing this tiny amount of capital with the very pure goal of maximising post-tax returns in mind.

Recently, it's begun to sink in that I'm going to struggle to get any sort of investment business underway without some fairly huge levels of confidence in me from a set of very well capitalised supporters. And the types of people who would back me would basically ask themselves, "If he's so good, why is he so poor?" Which ends up with the slightly tortuous conclusion that, to be in a position to manage money away from the crowds, I first have to have enough behind me so that I basically don't need to work. Well, if that's what it takes, then so be it.

There's some freedom in the above, though. I was fixated on making my portfolio work in a way that would be operationally viable with a much larger sum than I am currently managing. And the case in point, LOQ, is not something that anyone with decent sums of money could invest much in. If you're managing £100m or so and want to get a decent return, you've got to start looking at companies with market caps broadly in excess of £100m to avoid owning more of the company than you can get in and out of easily. Any smaller and you're going to end up owning such a large chunk that you'll move the price significantly on your way in and out, thus eliminating the potential profits that a smaller fund could benefit from.

Happily, mini-investors with the time and skills can look in this sub-£100m market cap universe and find a wealth (literally) of undervalued gems to put their money to work in. Frankly, it seems like a decent investor with small sums of money should be able to totally destroy the market averages by investing a concentrated portfolio in this universe of stocks, so that's where their attention (and mine while not working for anyone else and managing miniscule sums) should be focussed.

It's been a year since I started this blog now, so I may post less frequently from now on. Here's the current portfolio and performance since inception, as at 30 November 2009. Hopefully I'll be able to update the portfolio and performance and check back on how the likes of LOQ are progressing in the future. It's good to get ideas down before the event, and check back later to see how things are panning out. As Buffett says, "In the business world, the rearview mirror is always clearer than the windshield."

Portfolio

BRK.B - 19%

HMS - 18%

MTEC - 18%

LOQ - 12%

EMG - 11%

ISG - 9%

WMH - 6%

STAF - 6%

GMG - 5%

Returns

(Compound)

Since Inception 3 years 1 year

Portfolio 59.2% 38.4% 7.1%

FTSE 100 26.0% -2.4% 26.8%

S&P500 -0.3% -16.4% 26.7%

(Annualised)

Since Inception 3 years 1 year

Portfolio 10.3% 11.2% 7.1%

FTSE 100 5.0% -0.8% 26.8%

S&P500 -0.1% -5.8% 26.7%

Inception was on 10 March 2005. Portfolio returns are calculated after all costs (paying the spread, stamp duty and dealing costs) but uses the mid-price for current valuation purposes. Index returns assume dividends are reinvested and do not take any costs into account (meaning the actual returns from investing in such indexes would be lower).

Live your life like a thrown knife

The title comes from a Todd Skinner quote, a hugely successful and motivated climber who sadly died a few years ago. The very concept appeals to me greatly, but the truth is that I've not exemplified the concept since my last posting.

In the markets it's been a fairly poor month for me, coupled with an odd sense of further positive reinforcement for both the value ethos and my potential skill as a stockpicker. The tragedy still remains that I have revisited the bearishness that I need to extricate myself from, and have done so not just with the purchase of put options, but with the sale of call options. Expiry is in September, so could all pan out in a positive way, but really I should be focussed on the search for value and the exploitation thereof. Not the search for direction, and the speculation thereon.

The most interesting move in the stocks I've been following would have to be that of HMS. From highs of around 145p (as mentioned below), the stock positively tumbled following an announcement from management that margins would contract in 2009 - something that had been clearly noted in the 2008 annual report. So not very big news, in my mind, but Mr Market voted the stock down to 110p, then 105p, swiftly followed by a low of 95p a week or so later. Supply outstripped demand., you could say. But in a small corner of France, close to the Swiss border, a rump of demand was buying as much as he could.

That particular story is still in progress. The stock got as low as 2x last year's earnings. Margins were noted as falling, but not collapsing, and revenues were reported to be up on last year. The product is strong and services a niche of the oil industry which is cash rich. All quite bizarre, and one to watch. It really looks like a $150m company to me and trades for around $60m. If it continues to grow as it has been the $150m valuation will look conservative. Definitely a value play, or I've just not uncovered why the market sees it as such an inexpensive company. One to watch for sure.

On the stockpicking front, another stock I was following last year has been having a good run of late. Michael Page, a recruitment agency, doesn't exactly sit in the recessionary sweet spot. Particularly in the UK where it services a large proportion of financial sector clients. However, my basic thesis was that demand for their services in emerging economies is set to grow as service sectors emerge to satisfy the needs of a growing middle class and increasingly complex 21st century societies. Happily they don't hedge their foreign earnings, so a falling pound is good for profits (aside from the causal or secondary effects).

Anyway, apart from the above, it just looked way too cheap for the potential growth possibilities and extremely strong management team. Essentially a value play with a potentially long-term investment horizon. So I bought. So far so good. Then, during the March rally (which continued into May!) I sold for a tidy 20% profit. This is, in hindsight, another in a string of disastrous moves during 2009 so far. Not so tragic in taking the profits, but buying at £2, with a future view of a value at around £10/12 (discounted to today to give £5/6) and then selling when the stock got to £2.40 was not exactly in-line with the philosophy of a value investor. The bearish sentiment ravaged my holdings and with the stock now over £3, the decision to sell isn't looking too wise.

Well, those are two stories of a few stocks I've been following recently. Equities are up, whilst the economy remains in the pits. There is work to be done on Nexen Inc, a Canadian energy provider with interests in the North Sea, as well as William Hill (back below where I sold my holdings in March) and Man Group (still hovering around 285p, pricing in a halving in AUM). But more interesting stocks may be uncovered during a two week stint with one of London's better investors, as I have an internship with a man at the top of the small-cap league tables planned for the middle two weeks of August. Hopefully I'll learn lots and be of some use to him. Time, as ever, will tell.

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.