October 2018 Portfolio Update

31st Oct '18 by Damian Cannon

58 comments 9965 reads

Well I don't mind saying that this has been a shocker of a month. I can't remember such a destructive period for a number of years but such is the risk of being fully invested and not using hard stop-losses. It's not that I'm unaware of the use of stop-losses, and I do use alerts to pick up on sharp falls, but I've come to realise that they don't really work with either my strategy or my psychology. Instead I'm looking for companies which should grow and prosper over the next 5-10 years and I'm willing to endure capital volatility along the way (since I don't intend to draw-down on this capital for 10+ years). If a profit warning comes along then I'll close a position without hesitation but beyond that I'm looking to remain invested in my holdings. Obviously this tactic looks a bit silly right now, especially when a good number of folk are tweeting about how they presciently sold everything and went to cash in the summer but you can't win them all.

Purchases

Burford Capital Bought 1859p and 1612p - October 18

Well the board at Burford employed outstanding timing at the start of the month by raising $250m from institutional investors at 1850p. When the price fell to this level the day after I figured that with the price at £20 just a few days before this was a good chance for me to top-up at more or less the equity raise level. In hindsight this was remarkably poor timing in the short-term; in the long-term I am absolutely sure that Burford will continue to deliver outstanding results and that the forecast P/E of ~17 will prove to be materially wrong. My reasoning here is that Burford has been employing ever increasing amounts of capital and that the profits this year are down to investments made several years ago (which is how it works every year). So their market is growing and Burford have an ever larger portfolio of cases in progress. Hence I made a second top-up recently to benefit in some way from recent volatility.

XP Power Bought 3048p and 2594p - October 18

As mentioned in my comments on the Q3 update below I think that XP Power is trading very well and is not at all expensive when you look at the forecast growth. Thus I added to my holding after…

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abtan

1st Nov '18

Thanks for the write-up, very informative.

You asked about why XP Power (LON:XPP) might not be the best investment, so I thought I would chip in with some thoughts having sold out in January:

Q3 to Q4 revenue last year actually dropped (Q3 = £43.7m, Q4 = £42.9m). This was even more worrying given that Q4 included revenues from the Comdel acquisition I believe - that was the first red flag for me, especially as no comment was made on this in the results - I'm always wary when something so material isn't clearly stated.
Q1 to Q2 revenue this year was flat. Going back to 2014, Q2 has always been higher than Q1. Another red flag.
So H1 revenue growth this year is ALL from acquisitions - not something I'm generally a fan of.
Given the increasing focus on own-design products I was expecting gross margin to be higher versus prior year. However, for H1, it was 46.7% vs 46.9% last year
OCF is c£30m which for me is not that high for a company with an EV of £530m ( FYI capex on average has been c £6-10m pa over the last few years)

Hope my thoughts help

Nick Ray

It's definitely been a horrible month with all the year's gains disappearing in a few days. But something one gradually comes to realise is that it is "not just you". In other words, it simply isn't the case that most or even many people triggered their stop-losses and went 100% cash before everything crashed. Because when you think about it, if they did the crash would simply happen earlier - and to whom exactly would this wise majority have sold their shares? (I think there is a "meta" reason why most people can't do this too. An economic system which allowed most participants to step outside the system in times of economic weakness would fail.)

I find it quite helpful to track multiple theoretical portfolios as well as my real money portfolio. The theoretical portfolios might be built on a range of different screens and ideas but they act as reassurance that I'm not doing anything too stupid with my real money.

One thing I have found though is that rather than try to find the "one true screen" which somehow embodies a set of rules which will give you an all-weather portfolio, you have to create a union of several screens each of which emphasises a different strategy. So to give a slightly over-simplified example, rather than try to find a QVM screen, you might need a QM screen, a QV screen and a VM screen and union the results. (Or to put it another way, you need to be able to OR screens as well as AND rules together.)

timarr

Obviously this tactic looks a bit silly right now, especially when a good number of folk are tweeting about how they presciently sold everything and went to cash in the summer but you can't win them all.

This always happens. However: (1) not everyone is telling the truth and (2) only the few people who did sell in the summer are tweeting about it, not the majority who didn't. There's even a name for this - self-enhancing transmission bias - people shout about their successes and not their failures. Stop losses are not the solution to everything, as we'll find out when markets falls go into reverse.

But it's refreshing to have someone telling it how it is.

jonno

Great update Damian
It takes a lot of effort to put together such a comprehensive review of one's portfolio. Once again thank you for the insight into your holdings, investment philosophy and honesty. In common with you and no doubt others of the Stockopedia community I have remained fully invested, but have tinkered around the edges, selling a few holdings where my conviction has lessened and adding to others. Also like many, my portfolio has taken a thumping during October, but staying invested is in my view the best approach over the long term.

I look forward to saying hello should you at the Mello event in London later this month, assuming that you are going.

Damian Cannon

Thanks for the feedback abtan - this is exactly the type of informed contribution that I was hoping for! I'm going to take these comments on board and cast a more cynical eye over XP Power (LON:XPP) as a result.

Cheers,

Damian

Thanks Nick - your comments make a lot of sense to me. As it happens I do use a set of screens to highlight interesting shares (one Q, one M and one V). It takes some effort but I combine these and rank the shares based upon where they stand in each screen. Like you I believe that this is a sensible approach. My only problem is that Stockopedia doesn't provide the tools which allow me to OR rules and I find that a real limitation. Unfortunately I haven't managed to get this point over to Stockopedia just yet...

Thanks jonno - I'm sure that many (most?) investors are following a similar pattern. I will be at Mello so it'll be great to catch up.

Snoo

Appreciate your honesty.

Do you have any rules regarding stop losses apart from the profit warning one? For mid and large caps I have a hard rule of 15% but rather annoyingly for some shares this has hit and in the space of a week the shares have recovered! Seems like a double own goal in this case.

No problem. My thinking around stop losses is very much a work in progress! Intellectually I like the idea of using them for capital protection but psychologically they don't suit me as I know that shares prices are volatile in the short-term and I'm reluctant to sell a good business just because their price has fallen. However these falls can occasionally be a precursor to bad news which I've overlooked. So it's complicated.

As things stand I have stop-loss alerts so, at the very least, such falls are bought to my attention. However when they're not attached to a profit warning, where I'll liquidate, then I'll review recent news updates and think about whether I want to act. Mostly I do nothing but make a mental note to consider a top-up if positive news then comes out while the share price is depressed.

So really I'm using them as a trigger for additional research rather than a call to action. It helps that I'm entirely ungeared and have a long time horizon. It doesn't help that I'm naturally optimistic and thus inclined to see the glass as half-full when actually I should be much more cynical. Hard to change though.

Damian

john2

I prefer to apply stop losses myself, rather than relying on ones applied automatically by my broker. This is partly because unrealistic prices can be quoted in the first few minutes of the market opening and partly because, as you point out, in markets as bad as those we have seen in the past couple of weeks perfectly good shares can lose a large amount of value in sympathy with the general market, then recover their losses pretty rapidly afterwards. It's not very nice seeing the value of my portfolio plummet, but having been through this situation quite a few times over the past 20 years or so I prefer to wait and see which shares do not recover when sentiment improves.

Of course, this approach begs the question of how to determine when a real 'sell everything' event has occurred, as it did in 2007-2008.

simoan

Hi timarr,

I find it pretty funny tbh. Apart from anything else, what does being 100% cash mean?? Do they phone up their company pension fund and ask to liquidate and stop all further contributions? Do they sell their house and spread the cash across multiple bank accounts with £80k in each, and wait for inflation to erode its value? Being 100% cash is idiotic, quite frankly. It's a very weak position and not one of strength as they would make out by posting about it. No right minded investor should ever being holding that much cash. You'd have to believe the world is about to end and then it wouldn't matter whether you held equity or cash anyway.

The trouble is, as you know (and this applies to the "I'm 100% cash brigade" too!) writing about it only reinforces your position. It's like you're trying to tell yourself you're right and you leave yourself open to the very powerful influence of "commitment and consistency". This is my favourite chapter in the Cialdini book btw. As such, I think Damien is incredibly brave writing so openly and at such length. It's the reason you will never find me doing so these days because I recognise I have been subject to such influence in the past. I assume you likely feel the same?

All the best, Si

"The trouble is, as you know (and this applies to the "I'm 100% cash brigade" too!) writing about it only reinforces your position. It's like you're trying to tell yourself you're right and you leave yourself open to the very powerful influence of "commitment and consistency". This is my favourite chapter in the Cialdini book btw. As such, I think Damien is incredibly brave writing so openly and at such length. It's the reason you will never find me doing so these days because I recognise I have been subject to such influence in the past. I assume you likely feel the same?"

This is a very good point Si. I'm certainly aware of the psychological bias to remain consistent with public statements and it's a risk. However I don't actually feel beholden to anyone with respect to these updates since they're really a log of my thoughts and actions for my own benefit. So I don't feel too bad about changing my mind as the facts seem to change!

That said one of my conscious decisions here is that I want to be as honest as I can, for my benefit as much as anyone else's, because I want to avoid tricking myself and rewriting history. In this respect writing and publishing my contemporaneous thoughts and actions is massively beneficial - once they're out there I can easily access these notes at a later date to remind myself exactly what I was considering at the time. Hopefully this reflection will allow me to improve my investment process.

Oh and I agree with you about the cash thing. Having 'everything' in cash sounds like an enviable position but there is a cost to this type of extreme action. I imagine that I'll only take such action if I have a known and relatively short-term need to have a high-level of cash on hand - then stepping back from the market would be a sound move.

Hi Si

Absolutely: it's commitment bias. I imagine we've both seen terrible results due to that - I seem to remember some insane and incredibly convincing poster on TMF cheerleading a single stock investment in Lloyds Banking (LON:LLOY) all the way to near bankruptcy, before then revealing that most of their money was actually in property, so it didn't matter ...

This is my favourite chapter in the Cialdini book btw. As such, I think Damien is incredibly brave writing so openly and at such length. It's the reason you will never find me doing so these days because I recognise I have been subject to such influence in the past. I assume you likely feel the same?

I'm much less bothered these days, I don't really care what people think of me: I've had far greater problems than share selection to deal with. I also no longer really believe that presenting people with evidence will change their behaviour - most people will only learn by experience and as all recent experience has been in bull markets it's not surprising to see confusion and market volatility. And, of course, opportunity.

As for 100% cash - I'd actually assumed that people weren't actually in cash, but in some near equivalent like short dated bonds. As you're only protected up to £85,000 it would be pretty crazy to be sitting on a ton of cash just as markets are teetering. But what do I know? Sod all, frankly - but if you can imagine it, someone is doing it.

Hi Damian,

Just to be clear, I was not trying to be critical in any way and like many others (I assume) I greatly enjoy reading your monthly updates. I also know that doing so takes quite some commitment in terms of time and energy. It also takes balls to continue the portfolio review posting after having such a terrible month, whereas most people would just bury their head in the sand and skip it. As such, I have no doubt about your honesty, both with readers, and most importantly yourself!!

Now I all I need to ask myself is whether I would enjoy your review quite so much if I didn't have a very similar approach to investing and hold long positions in many of the same companies (though thankfully not Pat Val) as yourself. I dare say confirmation bias plays a role and that if you were short and slagging them off my enjoyment would be far less :-)

Yes, I've observed (and made) some awful investment decisions as a result of commitment and confirmation bias caused by posting on and reading BB's. In my early days of stock market investing in particular, I made some truly terrible investments with commensurate results. This is the reason I rarely post or get involved in lengthy discussions any more because even when you know these biases exist they are still very difficult to negate completely, so they are best avoided as far as possible.

Sorry if I gave the impression I care what anyone on an anonymous BB thinks of me. I don't even care what people who meet me in real life think these days, such is life as an old git!! The one thing I have on my side is experience, and experience tells me it is impossible to time the stock market or know what the future holds. So anyone who thinks they can, and is so confident that they have no equity positions at all has no credibility in my eyes, and so is not worth listening to.

No worries Si - I haven't taken your comments, or anybody else's, as criticism in any way. You're probably right about being naturally amenable to my report given that we share holdings - I know that I tend to skim over articles where I've already made up my mind about a company and I don't much enjoy commentary that takes the opposite side to me. Oh well.

I've just counted and I have 14 holdings in common with you! I am also still in full-time employment and business is very good, so that helps get through months like October 2018 with a more relaxed attitude to whatever the stock market is doing to my portfolio. As long-term investors we should actually welcome volatility and falling share prices but it's still pretty uncomfortable to deal with psychologically, particularly if you are fully invested. I just like to count the dividends rolling in and console myself with the fact the dividend yield of my holdings has increased :-)

Obviously, your approach will be different if you are a full-time investor with no other source of income, but it still seems crazily over defensive to ever have no equity exposure whatsoever. Anyway, I'm looking forward to reading a hopefully more positive November update next month...

doug2500

Glad to hear a (slightly) bear case for XPP. It also looked like good value to me too, it still does, but maybe not as good. Need to do a bit of reading.

FWIW I've been about 7% cash for most of this year. Not so much by design just unable to find value and refusing to pay high multiples. Quite a few on my watchlist were getting close but have moved away again (for now!) so all I've done in october was a small top up of BUR (post rights, pre fall like you) and SOM. Also took part in Smithson IPO. Reading your posts is definitely confirmation bias for me, but enjoyable all the same.

I'm off to find out a bit more about B P Marsh - looks interesting.

October 2018 Portfolio Update

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Damian Cannon

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