Portfolio Review: How I beat the market by 33% in my first year of investing

1st Jan '16 by gundroo

33 comments 37977 reads

Introduction

I thought it would be worthwhile to share the results of my first investment portfolio on Stockopedia. By way of introduction I’m a private investor in my late-twenties with no previous experience in investing in the stock market prior to this year. In fact I’m pretty certain I couldn’t have told you the difference between a PE Ratio and a Dividend Yield last December!

My strategy for learning to invest was to read as much as possible from the best investors before making the dangerous decision to commit any money to the stock market. For anyone here that’s new to investing, the books I would highly recommend are the Intelligent Investor (i.e. the Bible) by Benjamin Graham, Five Rules for Successful Stock Investing by Pat Dorsey, You Can Be A Stock Market Genius by Joel Greenblatt and for those starting early Millennial Money by Patrick O’Shaughnessy.

My Strategy

After reading a number of books, I created a £42,000 portfolio in January 2015 with the aim of investing in UK small-cap companies.

My strategy was to identify good quality, reasonable-priced, growth companies with positive market sentiment. Investing in small-caps is inherently risky so I wanted to ensure that the companies I was investing in were financially sound, which to me meant having a reasonable debt position and the capability of paying out dividends to shareholders.

I set about finding these companies using a rule-based investment strategy in an attempt to minimise the cognitive biases of stock selection that we’re all plagued by.

Clearly the Stockopedia Stockrank metrics for ‘Value, Quality and Momentum’ can provide a good starting point, but I wanted to delve deeper than this and identify the most important individual metrics in each of these categories, amalgamated from the advice from a number of successful investors.

The Rules

The screening criteria I decided upon were as follows:

Value:

Enterprise Value /Free-Cash-Flow < 20

PE Rolling 1yr <20

Momentum:

Relative Strength 6m> 0

Growth:

Earning-Per-Share 3yr CAGR > 0

Quality:

Return on Capital Employed > 12%

Financial Health:

Long Term Debt < 5x Net Profit

Dividend Yield > 0%

Sizing:

Market Cp > £20M

Market Cp < £1000M

Sector Exclude:Financials

These screening criteria identified 21 stocks on 2^nd January 2015. The vast majority of the stocks were…

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Edward Croft

1st Jan '16

Congratulations on a successful 2015 Gundroo, and thanks for sharing this excellent piece !

Rusty2

Well done in your first year thats an excellent return. Some interesting rules, it will be good to compare yours with NAPS which was done about the same time and see which rules are working.

PS I think you meant 2 Jan 2015 not 2014?

charlene

Great post thanks for sharing, i will look forward to your updates, well done.

Paul Scott

A terrific article, a model of clarity, both in thought processes & explanation. Very impressive results too, well done!

It's been a very good year for growth companies, with many having perhaps one-off re-ratings, moving to much higher PERs. The danger now is that they might be fully, or over-priced, and maybe mean reversion might kick in at some point? So it will be interesting to see if the same approach keeps out-performing in future years. It does look a sensible set of filters though, I must say, so excellent work.

I'm looking forward to future articles from you.

Regards, Paul.

GrindertraderUK

A lot of knowledge plus success in one year for someone who had never studied the stock market before..well done! Impressive! Very Impressive.

GeoffMM

Well done mister medical man fascinated by your noise signal ratio you deserve to do well in the future after all the hard work

Sully8786

Yes, splendid results! Keep the updates coming :)

PUDSEY

2nd Jan '16

Wonderful, l thoroughly enjoyed reading this and hope you continue updating us on your investment journey!

Who knows you may be giving our resident small cap man a run for his money...

Ken Lowes

Well done Gundroo, not beginners luck, you put in the work and stuck with the plan. Clarity of thought unhindered by history and opinion has rewarded you well. There are three phases of entrepreneurial life the first is starry eyed enthusiasm developing into mature simplicity followed by complicated sophistication. The last is the road down, you read with enthusiasm, acted with maturity avoid the mistake of complicated sophistication. Stick with the rolling stop loss and protect what you have.

mpat89

Impressive post, thank you for sharing. Well done on how much you've learnt in such a short period of time.

Howard Adams

Excellent post Gundroo, thanks for such a clear and comprehensive write up. I think watching the performance of your 2015 portfolio into 2016, then comparing that to your new 2016 portfolio will make excellent reading if, as we hope (see requests above), you post updates in the future.

Regards
Howard

gundroo

Thank you all for your kind words! I'll try and keep you posted on the progress throughout the year as promised.

For anyone that’s interested I’ve created my screener here so you can see what stocks are flagging up for 2016.

Paul - interesting what you're saying about the growth re-rating. I did consider using PEG Rolling as a screener for the growth component this year. Looking back the average PEG rolling for the 21 stocks was 1.68 at beginning of 2015 and is now 2.05, which fits with a significant re-rating. Similarly the stocks flagging up for 2016 have an average PEG of 2.12, so not necessarily the cheap growth. I think 33% will be hard to beat!

gus 1065

Gundroo.

Thanks for posting your list. A reassuringly large number of these correspond with my own QVM Naps picks that I derived from a different set of selection criteria.

On the understanding that you have a broad enough group to be able select a subset to invest in, what further criteria do you apply? You might want to consider applying a slightly subjective test and look through some of the recent discussion threads as one or two of these stocks (e.g GVC Holdings (LON:GVC), Renew Holdings (LON:RNWH), Connect (LON:CNCT) ) may have a bit of hair on them such as excessive Executive LTIPs or comparatively weak balance sheets that aren't necessarily picked up in the raw Stockopedia stats. Also, as you allude to above, you might want to look at the specific Value Rankings as one or two of your screened stocks look quite expensive.

Good luck,

Gus.

Portfolio Review: How I beat the market by 33% in my first year of investing

Introduction

My Strategy

The Rules

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Gundroo

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