Small Cap Value Report (Tue 4 Jan 2022) - TAST, DX.

4th Jan '22 by Paul Scott

76 comments 9739 reads

Good morning, and happy new year!

For anyone who missed it, I posted my personal portfolio review of 2021 here. Warts & all. A disastrous Q4 wiped out most of my gains for the year, but at least the figures were still positive overall, so it could have been worse. I definitely need a re-think on my portfolio management, but apart from Boohoo (LON:BOO) (I hold) the stock picking generally went quite well. Here it is again, if you've not already expended 39 minutes of your life listening to me waffling on!

The trouble is, I've always tried to shoot the lights out, in terms of chasing very high annual gains, using gearing, and portfolio concentration, which produces violent moves up & down in my portfolio.

However, my SIPP has been quietly chugging away at a fairly pedestrian +17% p.a. for the last 9 years since inception. Sounds boring, but it's actually compounded to +360% in just 9 years (with no new money added - I started it with a transfer in of existing pension policies). Do that for another decade (or even two), and it would produce a spectacular overall result. So maybe I should forget about gearing, and just go for steady, ungeared, lower risk returns over the long term? That's what the best investors do, after all (stating the obvious!)

Outlook for 2022 - We seem to be entering 2022 with covid reaching a climax in terms of case numbers, but with a mild variant - surely the ideal scenario to achieve herd immunity? The main issue now seems to be staff absences, which should be resolved in weeks rather than months.

US markets are once again hitting daily new highs. Sooner or later, I imagine that bullishness should rub off on UK small caps.

So personally, I'm going into 2022 feeling quite positive about my small cap positions. Providing companies can pass on cost increases to their customers, then business should be good. Supply chains sort themselves out over time, although I have no idea when.

Explanatory notes -

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dhannaway58156

4th Jan '22

Somero Enterprises Inc (LON:SOM) I agree. I've been following it since around 2015 and the age of the CEO has been a concern for a while so it's good to see their earlier recruitment paying off.

I suppose there is risk in any transition at this level but I firmly believe that if the product is good enough then it should sell itself. Apple is a great but not very relevant example of this. I only mention it as I was staggered recently when I saw the appreciation in market cap since Tim Cook took over, how many saw that coming I'm not sure.

Back to Som. I listened to the q&a on the Piworld podcast and if I recollect correctly I think around 20% of sales are from new customers with the remaining 80% from existing customers, upgrades, expanding etc. They really value these existing relationships and the focus is on stable supply of replacement parts, training and helping them succeed as businesses. So perhaps a steady hand at the rudder is what is needed controlling operational costs and capex. In my mind that's what a former CFOs skillset comprises of and I've been caught in the crosshairs of a few in my time.

On another potentially opposite and rampy note that I should keep to myself. I think that the screeding machines could benefit from a robotic or AI element. With the aim being that once you get them on a steady supply of wet concrete they finish the job for you. Something like a robo lawnmower. It has been at least a decade since I laid concrete but it sounds feasible to me.

Camtab

Bit short term perhaps?

Paul Scott

Hi trader45,

Thanks for that. As I slept on things, and the generally negative tone of my portfolio review, I woke up this morning thinking a similar thing to you - that my +17% p.a. compounded since 2012 on my SIPP is actually quite good! It's turned £67k into about £310k. And the original £67k came from initial contributions by me of under £20k in the late 1990s.

So if I can achieve the same +17% p.a. for another 9 years, then my SIPP would hit £1.43m, which is within spitting distance of the maximum allowed of £1.5m (I applied to lock in a £1.5m limit with HMRC a few years ago).

Overall that would be a stunning outcome - turning £20k into £1.43m in about 35 years, or a typical working life.

It also shows the value of starting relatively early, and allowing compounding to work its magic, as so many books suggest.

So I'm definitely leaning more now towards taking my foot off the gearing pedal, and focusing on compounding at a reasonable pace, rather than trying to shoot the lights out with 100%'s gains in good years, and near death experiences in bad years.

For anyone who is confused by all this (see the other thread, this is not directed at you, trader45), it's just me baring my soul, and sharing my investing journey with others, which is interesting and stimulates debate. It's my money, so I'll do what I want with it - who says I have to be consistent, or just stick to one strategy? I'll do as I please, and don't see why I should be pigeon-holed into any investing category.

So some of my money is in long-term positions in the SIPP, and some is in an ISA, and some is in real shares, and probably too much is in spread bet accounts. Each to their own. But I've decided to reduce the weighting in the spread bet accounts, as it's creating way too much volatility.

As others have correctly said, and as I said in the video, there are lots of different strategies that people can try out, and find their own way of doing things. That was also the lesson of Free Capital (an excellent book) - that different people have formed their own unique ways of doing things. I'm certainly not pushing any one type of strategy, that's for everyone to decide for themselves.

Regards, Paul.

mojomogoz

Spend it now Paul...before the govt forces you to invest it all only in some strategic ESG projects they deign as critical that earn a negative real rate so as they can inflate their debt away whilst creating necessary infrastructure...I'm joking...but only partially...

Bristolian

Thank you SO much for your explanation regarding #SCS Paul, I completely understand and appreciate your comments. All the best for 2022!

brads13

Hi Paul

£1.5m in a SIPP isn't a maximum amount allowed, more that an excess over £1.5m (your Lifetime Allowance) triggers a tax charge upon certain crystallisation events. After age 75 (!) there are no further charges/limits.

Ian

Bouden54

Re Terry Smith, one wonders how much it's that he's been in the right area, rather than because of any amazing stock picking skill. I seem to recall some analysis which showed his fund was basically in line with a US quality/growth factored ETF, very much the area he's invested in.

tic_tac_toe

incidentally does anyone know when £scs are likely to update - will it be some time in Jan.

I want to have some cash at the ready

cmpeckham

If that's what Terry Smith really thinks then he's fooling himself. The difference between these companies and the rest is that the rest aren't priced for perfection, with assumed bumper profits in future being discounted back to today at near zero interest rates. To sustain their valuation, they need both the bumper future profits and the near zero interest rates to remain intact.

In an era of unattractive bond yields, many of these companies have become "bond proxies". If rates make a meaningful move upwards, long duration bonds will hurt badly. Bond proxies, which are even longer duration, are likely to hurt worse.

The premium being paid for quality is now higher than at any time in history. I would respectfully suggest to Terry Smith that relative values tend to move in cycles, not one direction for ever.

2020- 29th jan

2021- 27th jan

So expect on last weds of jan… 26th

yiannos1

to short it?

Tommy H

Hi Geoff

Yes I hold Smithson Investment Trust (LON:SSON) too as well as Fundsmith. At least one of the two are parts of all the portfolios I manage (now 6 people).

I think the clear one for me is I have been happy in the past, I am happy right now, but at the same time I am not a forever person. I have sold out in the past and probably will again in the future.

Cheers

Tommy

Zoiberg

That's my worry too. The virus continues to mutate and evolve in parts of the world that do not enjoy effective immunisation. There seems to be a general assumption that all variants from now on will be mild, which seems unjustified.

Dragon

M&c Saatchi (LON:SAA) Very big trades on this after hours @ £2 well above close of 167p.

Samsgrandad

my +17% p.a. compounded since 2012 on my SIPP is actually quite good! It's turned £67k into about £310k.

Hi Paul, this statement of yours has resulted in a lot of head scratching on this board, me included I wondered if my old brain was getting past it when I was unable to get the answer of £310K purely as an exercise in maths.

My way of working compound interest is: the principal is multiplied by (1+R/100)raised to the power of the number of years. 67000(1.17^9 ) This gives £275,262.82

Working backwards the 9th root of 310/67 = 1.186 so an interest rate of 18.6%

I'm guessing you used some approximation somewhere and you did better than 17%.

Have a great 2022.

Hi doug2b,

I am curious as to the proportion of your funds that you place in geared accounts and by how much your geared accounts are actually leveraged?

I'm generally an open book, but there are limits to what I'm prepared to disclose publicly. So I think that level of granularity would be too much, sorry about that.

GrahamF

An interesting perspective, but wouldn’t he argue that he is focused on ROCE, and the compounding effect of these companies reinvesting their profits will drive the share price in the longer term relative to the rest regardless of bond and interest rate market movements? Also, I guess he would argue that these companies are certainly not priced for perfection when he buys them. And there are plenty of growth companies in the USA that are priced for perfection to a much higher degree.

Martin VT

I see what you mean….that comes in at over 15% of £SAA shares traded @ £2 in this afternoon’s session.

5th Jan '22

Hi brads13,

Thanks for clarifying re SIPP.

timarr

However, turning 75 is a crystallisation event. If I remember correct funds over the lifetime allowance at that point are taxed at 25% as long as taken as income, Or something like that.

Small Cap Value Report (Tue 4 Jan 2022) - TAST, DX.

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Paul Scott

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