On Having A Variant Perception

What a great term, ‘variant perception’. It sounds both straightforward and intelligent. The meaning is also both simple and profound. How does what I think differ from what everyone else is thinking?

Well, if you take a moment to consider it, you’re really not going to do particularly differently to the average if you lack a variant perception. Equally, it’s worth considering that the ‘crowd’ could very well be correct in their thinking, and by seeking to be contrarian too often, you may end up fighting against the tide.

What this whole Value Investing business boils down to is the attempt to find better-than average businesses at lower-than-average prices. Ideally you’ll find a superstar business at a price usually reserved for basket cases, but that may be a wish too far for most of your lifetime (incidentally these wishes were coming true for brave investors back in March 2009).

Well, having tried both the global macro approach to investing, and the value investing approach, it just seems to me far, far easier to have a useful insight and a ‘variant perception’ in the field of relatively simple-to-understand businesses (micro-economics) than in the field of enormously complex and difficult-to-understand global economies (macro-economics). Not to say that the latter is impossible, I just personally find it much, much harder most of the time.

Being a fairly simple soul, and thinking that results gained from less effort are superior to those gained via more effort, the value approach seems preferable to me over the alternatives. This is especially true with small sums of money to invest, however I can see how things would change as the pool of capital under management gets large enough to limit your investable options in the equity space.

Back to ideas and performance, as it’s the end of the year. Some mixed luck came my way on the 11th of December. HMS, spiked up in price on news of an all-cash bid taking place. The price went from 125p to 215p in the course of the morning, and has been gradually ticking up towards the 233p takeover price ever since. This sort of luck is something that I’m very happy to receive every once in a while, although it is somewhat mixed as the company would be worth far more if it could secure reasonable funding from the banks. In the absence of available credit, it makes sense for them to sell out to a well-financed entity, but the deal was struck at a lower price to the acquirer than I think the enterprise was worth.

Anyway, that provided a nice boost to the portfolio to end the year up 24.1% versus 27.6% for the FTSE 100 index with dividends reinvested. Since inception the portfolio is now up 80.3% versus 31.8% for the FTSE and 1.9% for the S+P. Over the past 3 years the portfolio is now up 52.7% against returns of -1.0% for the FTSE and -16.0% for the S+P, also with dividends reinvested. Long may the outperformance continue!

In terms of current ideas, I’m looking at a US stock that builds GPS units, called Garmin, Interior Services Group and Lo-q in the UK, as well as Velosi and a fair few others. I’ve also been screening for new ideas via the Company REFS service and via the Bloomberg system, which has produced a cacophony of stocks to research in more detail. I’ve been meeting a few hedge fund managers to hear how they invest and talk about my ideas with, as well as some potential investors.

Well, a new decade is here and it’s time to look ahead. Significant uncertainty is all around, but this is always true no matter what the talking heads or wisdom of crowds tells you. I’m very pleased to have kept a record of the past year as it could well prove to be one of the most instructive (and possibly constructive) 12 month periods in my life. Whatever happens next, I’m guessing my role will be far more in-line with my ideals than in the past, which is a pretty nice thing to be able to say about your outlook, even if it’s not a particularly variant perception.

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).

A Bright Future

As the investor awoke from his deep slumber, the masks he had been trying on for size during his European sojourn fell away to reveal his true self. The sun was rising in the sky as he stretched his arms high above his head and his now expansive vision of what was to come filled his mind with wonder, excitement and no small degree of trepidation.

There is now a fairly unshakeable belief in me that I can outperform markets in general by a wide margin over time. That belief (and the expected outperformance) is large with small amounts of capital and shrinks with larger amounts. I think that most professional investors would say the same thing, but few probably have personal investment accounts that show they have been able to actually do this. Sadly, only a minority will have professional performances that beat the market averages over time - especially once fees are taken into account.

It may sound egotistical to say you are better than the professionals at an activity, especially one regarded as being so difficult to master, however, for the enlightened at least, the investment game is surprisingly simple and easy to outperform in. That is, before you take behavioural biases into account.

Plato once said, "For a man to conquer himself is the first and noblest of all victories." This couldn't be more prescient in the field of investment management. The only way I know to overcome the inevitable biases is to stick with one strategy and not be swayed by the emotions of the market. Whether or not this will be possible is entirely dependent on temperament. By understanding exactly why you should have an edge in investing, and checking each time you make an investment decision against a list of credentials for making investments, you can alleviate many of the biases that lead to poor performance.

The simple process of finding undervalued stocks may involve a vast amount of hard work, but happily this will neither feel hard or like work if you love what you are doing. You only need to sit and think carefully for half an hour or so on a given company to have an edge on many of the people who will end up buying or selling shares in that company's stock over the next few years. Some will be depressed at it's prospects and offer you very favourable terms to sell you shares in the enterprise at a low price, and some will be highly enthusiastic about the future for the company and willing to pay you a compellingly high price for a share in its expected future profits. It is the induced hope and fear of others that creates such rich opportunities for those with the right temperament, who are also willing to do a bit of work, to profit from their folly.

Sadly, many investors decide to invest for reasons other than a perceived gap between price and value. Exploiting the difference between the two is the lynchpin of the value investing process and has worked over and over again through a variety of markets and with clearly understandable and repeatable results (perhaps more in direction than in magnitude). That few appear drawn to the process seems odd, but when you factor in career risk for professionals and the extreme short-termism of many investors, it is more understandable.

So, opportunities abound for those able to be reasonable at assessing the fair value of businesses, and then exploiting the difference between price and value by buying where a sufficient margin of safety exists.

I look forward to a future where I will be able to help people invest more wisely. I look forward to a future where I can help people by compounding their capital at rates of return that will warm their hearts by helping them to meet their goals and fulfill their dreams. I look forward to a future where I will be able to think about investments all day long and teach others of the plentiful opportunities available in markets; to help them understand the mechanics of valuing businesses and profiting from the market's inevitable bouts of greed, fear and folly.

The road to this point has been rocky at times, and I've had to learn from mistakes that thankfully were never so large as to divert me from the path which I am still on. I will definitely seek out people who I feel I can learn from, but in the final analysis the real rewards of fulfillment and satisfaction will arrive as long as I can immerse myself in an activity I take real pleasure from, and by performing well in an activity that I, personally, attribute value to.

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.

Mr Bear Goes Into Hibernation

Finally the bear in me has been re-educated. It wasn't enough to endure multiple months of rising markets and declining net worth, my mental tenacity saw to it that my views were sufficiently entrenched to remain inflexible in the face of bullish market signals. Nor was it enough to know all that I'd written on since December last year. Not even the extensive knowledge of Value Investing principles from Ben Graham, Warren Buffett and Charlie Munger's writing would see to it that my investment decisions would be wise and profitable in what may amount to the best year in my working lifetime for investors to clean up without so much as breaking a research-based sweat.

How close was I, intellectually speaking, to becoming the man that I know I have the potential to be? How could I write in January that, "I have stocks picked out to research further, and ideas to progress. The speculation continues, but it helps with my markets education. I still think the best risk-reward lies in Value Investing. To time it right, I want to be bottom fishing with the tide firmly out."

Then to see the tide fall further from the shore in March than it has been since the mid-1970's - before I was even in existence - and not be focussed on the knowable and predictable rather than the unknowable and unpredictable.

The answer lies in human fallibility and the difficulty of being a contrarian when it really matters. An education can sometimes be expensive, but experience can be one of the best educators out there. It's massively frustrating to have had the time, energy, capacity, tools and capital to have profited immensely in a low-risk manner from the market's disconnection from reality earlier in 2009, but the outcome I've ensured by remaining a bearish speculator in a surging equity market is to have depleted the capital (and confidence) that could have been compounded by now into something reasonably impressive and transformed my hopes and dreams one large step closer to reality.

Here is what I wrote whilst at Octopus Investments in August...

"I'm more in the mini-bull market camp now, having arrived here still quite bearish at the start of last week. The whole scenario just feels extremely similar to 2003 - the lows in March, and the 'climbing a wall of worry'. Huge monetary stimulus finding goods and services to buy and pushing profits up. Sadly at the cost of future tax burdens and the deferral of necessary pain.

Also, whilst it feels like the Great Crash scenario was a possibility, this has now been averted (or postponed?). There's a necessary downward revision of profits as a proportion of GDP to come and that will be brought about by the rising costs of inputs to the economy in the form of imported commodities and finished goods from countries with rising currency levels. Inflation figures reported by governments don't represent real inflationary costs to consumers, so inflation may appear more subdued than it actually is.

At some point, I think that the Russel Napier scenario of rising markets being pin-pricked by the collapse in government debt values and the staving off of inflation by central banks as a highly likely scenario. But it is not imminent.

Overall, it seems eminently possible that profits could rise for a year or two only to fall back to 2008/9 levels (or worse) as the cost of risk free debt causes leveraged companies and consumers to retrench more fully or pushes them through their breaking points. I can see multiples remaining at current levels (15x or so) and profits rising by 25% or so ($60 to $75 per share on S+P), similarly to 2003 (but not to the same extent). Hence a 25% rise in the index as an upside risk.

As the bear market got going in 2008, I felt quite certain that we were looking at a repeat of 1929, with a 50% rally expected, to be followed by further, more aggressive falls. Now, I'm feeling quite certain that the worst was averted and a mini-bull market is going on. The major risks to this scenario are unexpected inflationary/deflationary pressures that suppresses earnings multiples and corporate profits. Over time I would expect these problems to be close to inevitable, with the S+P Index breaching it's 2009 lows. However my view that this would happen in mid-2010 is now revised to around mid-2012."

Whilst the above shows that market directional agnosticism has not yet been achieved, it also shows a view that is less ardently bearish than in times gone by. Fortunately, coupled with the above notions were some actual analysis of potential investments as part of the work supporting the fund manager at Octopus. And from these ideas a portfolio was born. All the investments I've made will be published here with prices at inception as a means to review the decisions at a later date, and hopefully as a record as to the methods and execution that will pave the way to future success for me as an investor, leaving behind a few years of volatile speculative activities and changes in fortunes that do not a potential Managing Partner in an Investment Partnership make.

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.

On seeking to change oneself

Following my last post, and a good night's sleep, I awoke and as soon as was possible commenced in deleveraging my own portfolio. Gone were the Apple shorts, gone the FTSE shorts. Back to simply holding positions in a few stocks where I felt I had an edge, which is to say a few stocks that I believed to be undervalued. But such transformations of temperament do not take place immediately.

According to the research I've been conducting, habits are the key to all outcomes. A more advanced argument from the realms of NLP is that values drive beliefs, which in turn drives your thoughts and from there you get your habits, which leads to your actions and thence your outcomes. But, crucially, those habits can be manipulated away from their basic tendencies with sufficient work. In some forms this is done by revisiting values that may inhibit outcomes at the other end of the relationship. I haven't been too successful with this approach though. In other cases, a simple application of a new habit (generally where it doesn't conflict with deeply held beliefs) will be sufficient to bring about new outcomes.

So, how do habits form? Well, simply from repetitive actions. By repeating an action every day for a month, it has been shown, a new habit can be formed. This seems to be a great path for creating outcomes in the future that I would dearly like, and I'm happy to say that some progress has been made in this area.

So, following the closing out of the more speculative positions, I adopted a new approach, although I did retain some of the old habits, which have caused some pain to my P+L. The new approach is the one I seek to maintain forever more. That of the Value Investor. Do enough work in valuing a stock to be comfortable with your own view on where it should be fairly priced. Check the market price and buy if significantly undervalued. Simple.

As a case in point, there was some volatility in the price of shares in Man Group following an earnings announcement on 28th May. First the shares fell by 10% on the earnings news. This was surprising to me as I thought the news was fairly positive. They had written down a retained stake in the trading arm that was (wisely) sold off recently, and underlying profits apart from that were strong, given the climate. So the immediate sell off was a bit odd in my view. And, what does one do when he finds an undervalued stock trading at a discount to intrinsic value - he buys. Unfortunately I bought when the stock was down 5%, so didn't get the best prices of the day but did well enough paying an average of 245p/share. They stock is back up at 285p today (16% above where I was buying) against a fall of around 5% in the FTSE 100 index over the same period.

But hang on. A one month period does not a long term investor make. At least the market voted my way after the first day of decline. Similarly my other favourite, Hallin Marine Subsea International, posted healthy gains over the past month and stands at 146p/share today. My view is that both these stocks are significantly undervalued and I continue to own them.

In my more speculative trades, I am now short US treasuries to benefit from a perceived rise in fears over inflation to come. I would like to short oil at what was recently over $70/barrel, but think I have no edge here. Incidentally, I have no real edge in treasuries, but was annoyed not to have done something about my views when 10 year yields hit 2%, so have done something about it at 3.54% (now 3.7%) and have a stop limit order in place in case I am wrong. For the general indicies, I have (speculatively) bought put options that expire in September on the S+P at a strike of 850. This is my psychological hedge, to offset the annoyance if markets tank and I'm not involved in the fall.

And so, it appears, the new thought habits haven't set in quite yet. I've not been glued to  a screen as I have my CFA exam on 6th June and have been busy ever since. Off to Italy this evening, so more busy-ness for a couple of days. On changing habits, Antony Robins notes that it is the pain and pleasure associated with outcomes that leads people to really seek change in their lives. Well, enough pain has been endured watching red numbers grow larger as my bearishness has been met with rising markets this year. And the last month has seen some pleasure from the shoort-term gains on Man Group stock and rising treasury yields. Perhaps more research, when there is time, and more competent investing with positive outcomes is the key to long-term success.

Of course that's why investors want to see track records in the first place, as they may be repeatable in the future.

So here's to creating the habits of success. Think long-term. Perform robust analysis. Always, ALWAYS preserve capital. And try to be macro-agnostic, or at least not incredibly biased in one (negative) direction all the time!!!