SIC Performance Review: A 52.6% Gain And Some Hard Lessons From The First Year

16th Apr '21 by Jack Brumby

33 comments 10045 reads

Somehow, more than a year has passed since the Stockopedia Investment Club's inception, and a lot has happened in that time. So we've decided to write up a review of the SIC's performance so far. If there's demand for it, we'll look to turn this into a more regular update.

For those that are newer to the site, a quick recap: at the start of 2020 the Stockopedia team set up its own investment club because there's no substitute for 'skin in the game'.

And let's face it, the first steps into the world of investing can be quite intimidating. We hear it from newer subscribers all the time and it's why we support an environment in which newbies can find their feet just as much as old pros can swap war stories.

So we set up the Club in February of 2020, in that strange period after the Covid cat was out of the bag but before the stark reality of lockdowns had fully hit home.

And our stock pitch template was hammered out in the wild months of March and April as retail investors rode out one of the most savage equity market drawdowns in history. Even seasoned investors had moments of doubt in those remarkable weeks, when the streets emptied and all the toilet roll disappeared.

But iron, as they say, is forged in a furnace. And it was in this incredible environment that many of the Club's members experienced their first real taste of the markets. Along the way there have been some great calls and a couple of 'facepalm' moments - including our biggest loss... Not a stock we bought that went down, but one we sold too soon and that soared to new heights.

You can read all about that below (hint: Slater Investments has just joined the party there, buying in at more than twice the price we sold out for).

So far we've found this to be a highly educational, enjoyable, and profitable endeavour. We hope you agree. You can find all of our write-ups so far in The Investment Club blog.

Portfolio performance

Unless stated otherwise, we will be discussing results for the period from fund inception on the 6th of February 2020 through to the 31st of March 2021.

Here is the time-weighted return (which removes the impact of deposits and withdrawals) of the SIC portfolio…

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Resource Man

16th Apr '21

I started investing for the first time mid november and find this really interesting to read and would very much like further updates. Thank you

corner22

Monthly/Quarterly reviews would be useful to read please

Kiewit

This is a great initiative and it is highly appreciated that you share it with the subscribers here. Its like a 'model' portfolio. Please keep sharing and keep us updated. Well done!

Jack Brumby

You touch on a good point in that a club environment, while fun, can make the process of regularly reviewing shares quite a lot more time consuming - particularly if we hope to keep pitching new stocks as well.

But a post-profit warning review process is an interesting idea and it's something I can raise for the rest of the club to discuss at an upcoming meeting.

I'm sure you know about the Profit Warning Survival Guide we wrote a few years ago, that will be a useful resource for the Club in future when we do have to deal with one.

For anybody not familiar with the PW guide, you can find it here - it's well worth a read.

gus 1065

An observation (from bitter experience) of the need to monitor share price and for that matter traded volume is that this is arguably the most immediate and potent signal of a possible variance between what we think we know as individual investors based on data such as Stocko reports etc., and what the wider market knows (or at least thinks it knows) based upon all available information/gossip/inside track/ relevant related news etc..

Several times I’ve blithely ignored a sudden price jump or fall only to discover after the fact that big movements in share price backed up by heavy trading volume is often a lead indicator of something material coming down the pipe that is not yet in the public domain. At the very least, even if you don’t trade positions based on stop losses they should trigger a bit of enquiry to find out what the wider market thinks it has found out.

Gus.

bryans1311

On Ferrexpo (LON:FXPO) I definitely agree with the country-specific risk, and also the presence of a less than desirable majority shareholder.
With regards to mine location, I’ve seen comments previously that they’re approx 400miles away from the build-up at the Russian border. Do you have specific information/coordinates on the location of their mines? That could change my investment position entirely.

john2

Regarding stop losses, I am a great believer in them because they protect from capital loss. However, I do not think that stop losses lodged with one's share broker are a good idea. There are often wild swings in a share price at market opening which can trigger a stop loss, but settle out in a short period of time.

I think it is best to apply a manual stop loss based on monitoring share prices on a daily basis, which also allows one to consider if a share price reduction is an overreaction which will soon correct itself.

Some years ago, I had a substantial holding in Compass (LON:CPG) (hardly a small cap), which hit the stop loss level I had lodged with my broker at market opening. 15 minutes later, the price had recovered and I repurchased at a total loss of 5% or so.

ezlifeme

Jack - May I say a fantastic analysis of your clubs trades and mindset of the investment decisions and trades

2020 for me was a HUGE mindset issue of the whole decision process

Do I HOLD or do I SELL? - I too have several runners that I let loose FAR, FAR too early

What have I (possibly) learned? - Let the post sale runners go, BUT re evaluate the SELL decision

No bragging but I also have some quality winners that also ask questions

Why did I decide to HOLD? - Was it valid? Is it still valid?

More importantly have I learned anything?

WHO KNOWS? - The only conclusion I have is? - I LOVE being in the market

TEIN

Try this for Ferrexpo (LON:FXPO) mining locations, (or do your own Wiki for Ferrexpo):

https://en.wikipedia.org/wiki/...

The Ruskies will have to march most of the way across Ukraine from East to West to reach Ferrexpo, or maybe they'll just use Crimea as a springboard, then there's always the Black Sea for an amphibious landing, the latter two being closer to Ferrexpo's back yard - it depends how much the Russian's want some quality iron ore pellets.

All said, just one pair of boots on Ukrainian soil will take it's toll on Ferrexpo's share price and no doubt the markets in general.

mossy2000

Very interesting, sadly I got in on Volex, Tharisa and Ergomed somewhat late, but very pleased with Sylvania Platinum.

AllanDavie

17th Apr '21

I agee with John2 below, setting a stop loss with a broker can be an over reaction. I am currently trying to develop a stop loss approach based on whether the price drops below the moving average. Picking a 60 day, 90 day or 200 day moving average is then really just a matter of risk tolerance.

V4Value

Buffett, "We sell when the fundamentals have changed".

Excellent article Jack, thought provoking. Markets are an unsolveable riddle aren't they? For stop losses, I always end up coming back to Buffett and his policy for holding. In my experience, the StockRanks have worked really well and I've only sold once the numbers turn south. So, you're already thinking along the same lines. Don't sell on price action alone, but only sell if the quality deteriorates. You just need to decide on the Quality levels at which you sell. Most of my major losses have been due to holding losses too long and hoping for a turnaround. It worked out only a couple of times, Somero Enterprises Inc (LON:SOM) and Games Workshop (LON:GAW), but mostly it doesn't and there is a huge opportunity loss that comes with holding losers.

I think selling rules are a great idea and brings discipline into the investment process, rather than acting on psychological biases. Then sticking to the rules is the next hurdle, though with an investment club, that issue is removed!

Dave83

Thanks for this update - very useful.

I have backtested the use of stop losses extensively on a stockranks type portfolio and found that stop-losses decrease overall returns for the kind of portfolio that SIC is running; however, they work at reducing drawdowns, and more importantly, providing a "max loss" scenario i.e. what is the worst case scenario. In other words, it improves your Sharpe Ratio. So having a stop loss/not having a stop loss both work (as an ancillary point, if you are short term trading, you absolutely would deploy stop losses).

Notwithstanding the above, I'm a firm believer in "less is more": I do see the intrinsic value of not adding complexity by adding stop losses etc. as it leads you to tinker with your portfolio, which more often than not, is best avoided - i.e. negates discipline.

Why use stop losses if they lower return? of course, we all want the highest return with the lowest drawdown but the reality of equity markets is that, once in a while, you could have a 75% drawdown across your portfolio (which will cripple you psychologically) and no amount of diversification across stocks/globally will protect you from this.

A stop loss will prevent this. Also, if you tell people, the risk is a 75% loss, most people will run a mile; a defined max loss may encourage participation into equity.

As a position trader/investor, I used to simply diversify amongst 20/30 stocks and NOT have a stop loss but have now started applying stop losses (I'm always open to experimenting):

a) to protect capital and allow me to deploy more capital (as I know my worst case, so I would be less averse to put savings I may need); and

b) to be able to deploy size into any one stock (i.e. if I know my worst case for a particular is a 1% loss on my portfolio, I can invest more heavily in a particular stock, rather than diversify equally between many 2% positions).

However, I am a trend folllower for the most part and my stop losses are structural and loosely defined - I would like to see how the stock is acting at key points - it is not an order resting with the broker; I may give it weeks before I cut it. Sometimes the stock goes back up after I cut it, sometimes it falls below and it feels like you've sold at a time when a stock was at a buy point: a key to dealing with that is anticipating and visualizing how you will react in such circumstances and perhaps having different approaches with different stocks, albeit that adds complexity and cognitive overload. I can always get back in and there are hundreds of other opportunities.

As for fundamental stop losses, for me price is the most important signal - I don't really care if fundamentally it appears well if price is signalling the opposite. I invest/trade price because on average, I expect I will be better off making money from price movement, not my fundamental assessment of the company. I don't have any burning desire to be proven right by anchoring to my analysis. Also, I sometimes buy fundamentally crap companies (i.e. low stockranks stocks), which are rising on sector momentum or sentiment. In that case, you'd be holding on to a narrative as the stock collapses, so need to avoid that.

Another tool that may be useful is selling chunks of a stock when its going very well - that may be helpful in allowing you to keep some stocks when they're not doing so well as you've already banked some profit, but again, that adds complexity.

dmcarver

Tein did his homework which I should have done. The mines are around 300 km (200 miles) from the nearest Russian frontier. The Crimea is further. the closest frontier about 400km away, but that's not where the Russian's have concentrated their troops. Rather they are just on the other side of the frontier from the dissident Ukrainian region. But we agree that the growing threat of Russian intervention, carried out or not, makes Ferrexo a politically risky investment. It seems to me that there are other possibilities of high return placements with considerably fewer geopolitical risks. If you like mining, check out Rio Tinto with an even better yield, a solid balance sheet, a substantially lower political risk (though China is not the most reassuring region in the world), and there is no withholding tax!

To provide a rather lengthy commentary on the situation, here is an interesting article from a German research institute. https://www.swp-berlin.org/en/... Russian intervention or simply visible threats are not the most encouraging investment environment.

flatman100

Jack - really interesting article, thank you - would definitely like to see this continue. I took my inspiration for portfolio construction from the NAPS portfolio article in January, although I don't run it as 'no admin' and have also had a tricky time deciding on my stop-loss/sell criteria so your thoughts on that make interesting reading although they appear to be very similar to yours. Keep up the good work, and good luck with it!

Sarah Froggatt

Consumer Defensives: Like Indie I've recently bought into Bakkavor.

I also hold Wynnstay and am giving Carr's a whirl.

Kelvin Prescott

19th Apr '21

I do something similar with strong performers... primarily to maintain diversification (if all of my picks had a 50% gain I would do nothing. A situation that has not yet occurred, sadly).

I did a bit of analysis of the use of StockRanks as a sell indicator here https://www.stockopedia.com/co.... One of the key insights was that Stockrank performance by decile doesn't follow a consistent pattern. You can't safely assume that a stock with a rank below 80 will perform better than a stock with a StockRank above 80. In some cases, its the other way round.

I've adapted my own sell rules as a result, so that

- I use Stockrank to identify what large caps not to buy. They predict poor performance (Stockranks <30 have a negative performance), but have negligible predictive power for high performance (there is no material difference between Stockrank 40 and Stockrank 80 performance)

- I stick, very rigidly, to Stockranks for mid-caps. In this segment there is a very consistent relationship between Stockrank and performance

- I entirely ignore Stockrank with micro and small caps. In this segment there is a bell curve effect: both very high and very low stockrank companies dramatically outperform the ones in the middle.

doctor dave

15th May '21

Stop losses stop top gains

Share Hunter 61

well done on your first year youve done brilliantly ! A suggestion to you all is as we are now looking to infrastructure in the coming years perhaps we should look to companies like Ashtead and keir as well as more steel producers like Evraz ? All are doi g very well and with Evraz over this year ive acheived 125% profit margin and im sure these companies will continue to do well ? What do you think ? Best of luck everyone !

SIC Performance Review: a 52.6% gain and some hard lessons from the first year

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Jack Brumby

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