Small Cap Value Report (Wed 15 April 2020) - OBR Report, BKS, CTP, SOLI

15th Apr '20 by Paul Scott

92 comments 9815 reads

Good morning, it's Paul here, with the placeholder for today's SCVR. Please add your comments in the usual way, and the main report should be finished by 1pm today, depending on how much news there is. Edit: predictably, I'm running late, so will finish at 3pm. Today's report is now finished.

In case you haven't seen it, Jack has published an interesting article here:

Multi-bag or bust? RTN, MAB, RBG, and OTB

OBR coronavirus reference scenario

This document published by the Office for Budget Responsibility has understandably caused a furore. It's a forecast of what impact coronavirus might have on the economy. Being sensible people, they are not calling it a forecast, but instead a "reference scenario".

Economic forecasting is widely discredited, because people repeatedly try to forecast, repeatedly get it (often wildly) wrong, but continue pretending that they actually can forecast the future with any accuracy, when they cannot. Former Bank of England Governor, Mervyn King, has written persuasively about this, urging economists and pundits to stop pretending that they can forecast the economy, because they can't.

There's a terrific book on this called "Super-forecasting: the art and science of prediction". This makes the same point. Dominic Cummings (Boris's brilliant adviser) spat out the name of this book to journalists doorstepping him, obliquely calling them "useless political pundits", and suggesting they read this book. It's a fascinating read, highly recommended if you haven't already seen it. The core theme in it, is that a long-running study showed that many experts & pundits are useless at forecasting, but nobody ever pulls them up on their serial failure.

The same useless forecasters repeatedly appear in the media, despite getting things mostly wrong. It also identified (through a scientific process) an unusual type of person, who presented with facts & figures and allowed to research economic or political issues independently, were proven to be amazingly good forecasters. Not experts, but smart laypeople. Yet these super-forecasters rarely had any influence or involvement in policy, or even media commentary.

The conclusion being that we need to measure the accuracy of pundits forecasts, and jettison the ones who are no good. Then recruit the unusually good super-forecasters to give us predictions instead. Very sensible, but it won't happen. Apparently, an engaging & confident manner is enough to convince media outlets that you talk sense.

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About the Author

Paul Scott

Premium Member

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for Stockopedia.com on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »

92 comments

ACounsell

15th Apr '20

Looking at that performance in the current climate you should be managing your own investment fund! As this is from a Stockopedia folio I assume you must be invested in shares, Investment trusts and possibly ETFs plus the cash that has accrued from transactions (and that thing of the past , dividends). To achieve this performance I would have thought you are probably heavily exposed to FAANG+ stocks and/or a very good trader who bought at the last major dip in March and benefited from the recent rally. Today’s market tremors may be a sign that you can repeat the process - if so would love to know your strategy as I suspect like many investors on Stockopedia I am sitting on losses despite having a SIPP with a large cash % even before the COVID-19 crisis . A very risk averse strategy offset by a slightly more racy strategy for my ISA which of course is down 25%+!

peterthegreat

15th Apr '20

Thanks for your latest views on coronavirus Paul and for the book recommendation, which I intend to read. Further to my post of 9th April, your hope for lockdown to ease by early summer is possible, but almost certainly some degree of lockdown will extend beyond this. Almost certainly there will be addiitional waves of infection before an effective vaccine is developed, trialled, bulked up and administered, so lockdown will need to be re-introduced, though not necessarily to the same degree. Although I have a Ph.D in microbiology, this knowledge is not needed to make these predictions, you just need to read about the 1918/19 pandemic to understand how respiratory viruses behave. However my final fear is pure speculation. With 3 deadly coronaviruses emerging in the last 13 years (SARS, MERS & COVID-19), I wonder if the virus has undergone a mutation which encourages pathogenic variants to emerge - I sincerely hope not.

Doggy100

15th Apr '20

would you know roughly how many died with only Covid 19 and nothing else?

dealtn

15th Apr '20

Well his fund is benchmarked and promoted as a UK Small Company fund. By inference his "job" is to be invested in that manner. If investors in such a fund want to reduce their exposure to that asset class it is down to them to do so by selling and exiting, not the fund itself.

GrahamF

15th Apr '20

Hi John

Sorry, but I’m not going to spend any time reading that website. It is by someone who chooses remains anonymous, and also admits he is not qualified to provide a detailed analysis. You seem to believe that the authorities are an incompetent shambles. If that is the case they surely do not have the competency to coordinate a campaign of misinformation across government, NHS, PHE, Imperial College and so on.

johnsmith68

15th Apr '20

Really the only point I was trying to make (and I'll concede that I made it hastily and without sufficient humility) was that someone whose job is to manage client's money absolutely could have foreseen this by simply staying abreast of the news. I manage my own portfolio in my spare time and I foresaw it in February and took action. You could say that I got lucky and that may be true but I feel that there was plenty of mounting evidence in early February that risk:reward was getting dangerously out of balance. To say that it came out of nowhere is disingenuous in my humble opinion. I certainly wouldn't claim to be a great or even a good investor or to have even a fraction of the analytical and financial skills that KAL and most of the contributors here have. I just believe that this was signposted from Wuhan long before the market took notice.

johnsmith68

15th Apr '20

Hi Acounsell. Thanks for that but as I say in reply to another poster here, I wouldn't claim to be a good investor. I'm a novice and I frequently worry that I don't know what I'm doing but when I see an experienced fund manager claiming that this current crisis was totally unexpected, it makes me think that I may be better off managing my own affairs. I believe there was plenty of evidence in early February that this was getting very bad. The trading update from Burberry (LON:BRBY) on February 7th was a clear signal that anybody could have interpreted. All I did was to move into cash and stand aside whist the crisis evolved. I was lucky but I made some of that luck I believe. I repurchased some positions at better prices so I have seen some of the recent rally but I am still mostly on the sidelines for now. What happens next is way more difficult to gauge and arguably this is where KAL and other professionals will earn their money going forward. I wouldn't bet against his fund doing considerably better than my portfolio in 5 years time and that really is what I should have made clear in my original post.

Tonysaparito

15th Apr '20

Good Evening ExpectingValue.

Thanks for your reply and it is fair question to ask, so tomorrow I will reply to you at length.

jwebster

16th Apr '20

"Finally, I urge everyone to read the March 2020 fund review by Keith Ashworth -Lord ..his Buffetology fund did lose over 26% in March but when he stated he did not see the lockdown coming ..and other comments and observations , it illustrates to me that many professional fund managers should not be managing their clients money....."

I read KAL's commentary. I thought it was fairly straightforward at least. Not many fund managers talk about their losers so openly.

As a professional fund manager, should he have seen the fall coming and sold in advance? I think it depends on his investment remit, which is to buy good companies, valued on a DCF basis, and hold for the long term. I would not want a fund like this to become a trader, trying to front-run dips. If I want that from a fund, better to invest in a long-short, absolute return or all-weather style fund.

Otherwise the hedging is up to us.... short the FTSE during downturns.

As an investor, I always compare buying a managed fund with simply buying an index tracker fund. The fees are far lower so less leakage in the long run, more compounded growth, which really adds up. A fund manager has to have 'alpha' to pay back their fees and more. As a result, I usually avoid funds, many are really closet index trackers with no edge.

KAL may or may not have an edge. At least he seems to have some sort of process, using DCF. But his holdings appear to lack concentration. In comparison, his guru Buffett's (Berkshire Hathaway) top five stocks account for 69% of holdings, somewhat driven by his huge Apple holding. KAL's top five is 21%. Buffett did maintain it's better to hold a small number of great stocks. One of Buffett's quotes went something along the lines of "why would you invest in many stocks, why not put more money into your best three ideas". It was also Buffett's point here "diversification is protection against ignorance".

So I avoid funds, prefer trackers in this instance.

john652

16th Apr '20

Hi Graham & IncredibleMosesLeroy

Some good points but my point still stands.

Is a total lockdown , the shutting of the economy, on a global scale in proportion & the correct playbook.

I am not suggesting there should be no restrictions, but this is not eradicating the disease, just slowing it.

There are alternatives, A partial lockdown , isolate all over 60, all with serious illnesses, social distancing, more restrictions in areas with large number of cases. Let the rest carry on.

Is that more in proportion? Even if this is considered an approach that now stands with hindsight, what can't be argued with is that the NHS can cope, the curve has been flattened. So today, right now, is continued lockdown a proportionate response given what we now about the disease compared to the economic destruction & all the other implications that follow?

Tonysaparito

16th Apr '20

Good Afternoon Expecting Value.

I hope you will not take offence at anything I write below and if you find what I write brutal so be it, because if you are investing in small companies, as many of us are on these pages , you must realise we are prepared to accept greater risk.

Having said that I manage my own pension fund through a Sipp and a Sass and in addition I have residual income from a portfolio of properties..

However, all the money I have made from my businesses in my life have been hard won...and the area of business where I accumulated the most profits was horse racing and betting...so when it comes to evaluating risk, I understand that equation as I have been involved with both property, betting and investing for a very long time ..and through my betting understand risk and reward more than most.’.

I have lost count of the number of operators who made mind boggling profits only to lose them and very often because they are complete gamblers.

From my experience, the most successful bookmakers , some of which have and are clients have mine will tell you , ‘“ the most successful bookmakers do not just lay the horse but lay the punter”.

In addition, the most successful punters are those that accept all the risks involved and that the simplest way to success, is to limit your losses...the less you lose the more you win, it’s as simple as that..

However, many of my clients , are successful businessmen and women who have been clients of mine for over 25 years...they remain clients of mine because I proved over a long period what I can achieve for them.

So before I started the process of investing for my pension, I deposited my money into my Sipp and Sass banks accounts ..then completed several years of research, into every investment manager, fund manager , share tipster, etc etc.

At the end of that defining process, I decided that about 90% of my money would be invested with what I considered one of the best investment managers...his performance, his history , his track record could be traced back a very long time....you can do the same .

I read letters from him , I watched videos about him and I took third party opinion about him ..but in the end my decision for my money was to be made by me...I wanted the man who looked after 90% of my pension money to give me complete confidence, so I could go to bed at night and sleep.’.

This man had to have an investment philosophy like mine...which is to invest in world class companies, whose businesses had a moat and whose previous track record was there for all to see...no exploration companies, no banks, no insurance companies, no airlines , no businesses based on the “ fair weather principle” .

And ...and a man whose company had a philosophy which was to buy right, hold and do nothing ...a company that would run with its winners , as multi-baggers can be had from trading , investing for the long term or a bit of both.

In a nutshell, buy and forget....I want as many 10 or 100 baggers as I could get

Now the final 10% of my pension is totally my betting bank , for buying and selling shares in companies , I may trade or I may hold ...I am prepared to accept far greater risk here , as I know if I want high rewards I have to accept high risk but I am happy to accept the equation .

In my research or due diligence I came across Keith Ashworth -Lord.... KAL Sanford DeLand UK Buffetology Fund —-The length of the name of the fund was off putting I have to admit but nevertheless, I looked at the fund and watched it for several years , as my money sat and earned diddly squat in my pension bank accounts.’.

I looked at countless funds and monitored their performance , I looked at their good months, their bad months over many years...I wanted transparency and I needed liquidity , so if the proverbial was to hit the fan, I could liquidate my holdings...I did not want to find my money with a guy like Neil Woodford and be trapped...I avoided by the way , the funds in the Hargreaves Lansdown wealth 50 and similar bullshit traps that snare ordinary men and women.

If you are not bored to death by now ExpectingValue , you might suggest I was asking for the impossible...but in addition , I looked for a man who could get close to delivering an annual growth rate over a few years.of 20% noting I would accept a year of poor performance in return for years of over performance..

KAL over 5 years looking back from today, with figures provided by Hargreaves Lansdown as are follows...they are there in black and white.

DeLand UK .

12 months ending -15-4-16 = £ 16.42% .

12 months ending -15-4-17 = £ 20.69%.

12 months ending -15-4-18= £ 17.94% .

12 months ending -15-4-19 = £11.25% .

12 months ending -15-4-20= £10.17 minus.

Remember, 5 years ago the DeLand Fund was a bit different to what it is today and the fund was established in March 2011.

KAL professes to be a disciple of Warren Buffet ..what a load of tosh...I cannot imagine Warren Buffet investing in Revolution Bars Revolution Bars (LON:RBG), Restaurant Group Restaurant (LON:RTN), Craneware Craneware (LON:CRW), Dart Dart (LON:DTG) and Provident Financial £PFG.

However, to give KAL credit he did hold stakes in some Buffet style companies that perhaps Buffet would admire, such as Games Workshop Games Workshop (LON:GAW), London Stock Exchange London Stock Exchange (LON:LSE) and Relx Relx (LON:REL) and others .

Now compare the figures below to the performance where 90% of my pension money is invested...I made the choice , I made the decision and if I mess it up I will blame myself ...but of course I can also blame the man with whom I have entrusted my pension fund.....because I chose the wrong guy ...and we are not talking about insignificant sums here...this is money that will allow me, my wife and our children to have a comfortable retirement when that day comes.

12 months ending -15-4-16 =£17.44%.

12 months ending 15-4-17= £27.45% .

12 months ending 15-4-18=£ 8.18% ..

12 months ending 15-4-19 =£24.24% .

12 months ending 15-4-20 =£4.36%

Over 5 years as you can see KAL has attained a satisfactory total return of 56.13 % and to date has recovered about 15% since its 26% loss I spoke about previously ..

My pension fund is invested with a man who has returned 81.67% over the same identical period as KAL....the difference is an additional 25.55% of performance over 5 years.’

You , ExpectingValue , do not need to be a brain surgeon to recognise this outer performance compared to KAL ..and hopefully accept my evaluation all those years ago has proved to be a good investment.

Remember also. when I did my research 5 or more years ago I was looking backwards in the hope I could see good results going forward and on the face of it the above figures from KAL are reasonable...provided you are prepared to forget that 26% Monster loss detailed in March , when KAL stated “ did not see that coming“ ....I personally, see a loss of 26% in 3 months , as a “ canary in the coal mine moment to any investor in the Buffetology fund run by KAL...many will disagree but frankly I do not care about that .

I love Tesla but the shares trading at over $1000 in mid February was a clear sign to me that the bull market had reached its summit ...and soon after sold a big chunk of my holdings to give me 35% cash.....interestingly , since I sold a big chunk of my holdings, I like most people have been amazed at the recent sharp recovery.’.

At this point you probably are wondering where I have invested 90% of my pension fund......so I am going to tell you.

However, before I tell you, please tell me more about you...are you invested with KAL..do you control your own investments ..not because I am nosey but because I am eager to learn from everyone on Stockopedia .

Go and check out Terry Smith and `Fundsmith Equity and as that bread advert used to say..” Enough Said” .

I sincerely wish you prosperity but I know one thing for sure, many men and women do not learn from their mistakes ..whatever you believe.

Finally, one of the other enquirers asked if I had invested in the FANGS ..Terry Smith in his February 2020 Shareholder meeting which you can view on Fundsmith website..gives a most interesting view on why he is no about anytime soon going to be buying either Amazon or Google Alphabet.

My view as to the best way of summarising Fundsmith ..is straightforward ..it is a GOW Fund....a fund for Grannies, Orphans and Widows .

Apologies for any typos and note I hold shares in Revolution Bars £RBG...I frankly do not care if the company goes bust..I do not believe it will as Paul has outlined all the risks elsewhere..but it’s going to a fun ride along the way and that’s why I have a 10 % fun fund which may go pop or may allow me to replace my Mercedes which has just completed 290,000miles ..why put money into a new car when you can speculate in a new share ..that just might turn into a 10 bagger.

shipoffrogs

16th Apr '20

My back of the envelope returns for the Buffetology fund and Fundsmith for calendar years 2013 to 2019 are average annualised returns of 18% and 20% respectively.
Their outcomes over 7 years aren't that much different.

Paul Scott

17th Apr '20

Hi Henry,

Good point. I've got the Stephen English video in an open tab, just haven't had time to listen to it. One of my shrewdest friends says that recurring revenues are not all they're cracked up to be. It's certainly worth asking some questions.

As regards Beeks, one of the things I like about the company is that it's service is incredibly cheap, and there doesn't seem to be much competition. Hence its recurring revenues are likely to be quite solid, although I reckon some traders may have blown up in recent market volatility. That's only likely to be small beer for BKS though, I remember them talking about £15, or possibly £50 per month for traders, depending on what feeds they want.

Above all, I think we're backing brilliant management at BKS. PIWorld have some outstanding videos of presentations. The thing that really stuck in my mind, was that the CEO set up the business for his own algorithmic trading. The story is that traders & brokers then started coming to him, referred by the exchanges, asking to pay for his service. i.e. he says he had no outbound sales operation at all! If that's true, then it's extraordinary, and a business worth backing.

Paul Scott

17th Apr '20

Hi pgs501,

Do be careful, because I tried to make money from EU Govt bonds, etc, and it was a real rollercoaster. I made an absurd profit one week, then lost it all the following. The trouble is, if we're not familiar with risk:reward, and venture outside the scope of our expertise, then it could open up disastrous losses.

I'll never forget how a suicidal spread better contacted me a few years ago, after the Swiss currency peg broke. He incurred ruinous losses. Hopefully he's still alive, and managed to negotiate a way out of his losses.

The general rule therefore is, to stick to what you know.

Regards, Paul.

Paul Scott

17th Apr '20

Hi nervous2,

Yes, sorry about that, I ran out of energy, had a funny turn, and had to spend the afternoon in bed. Had intended to look at Costain (LON:COST) but it was not to be. Sorry about that.

Regards, Paul.

Paul Scott

17th Apr '20

Crap comment. Maybe keep your counsel until you have something intelligent to say in future?

Paul Scott

17th Apr '20

I never buy shares in banks, usually.

The figures are impossible to fathom, and hugely leveraged to downturns. So this seems amongst the worst possible time to be buying bank shares.

Paul Scott

17th Apr '20

Hi Andrew,

Sorry I didn't get round to looking at Tuffnells. The logistics sector doesn't interest me, so it's not something I would want to invest time into.

Regards, Paul.

Paul Scott

17th Apr '20

I bet that the share price spikes won't last, from tiny, irrelevant companies which seem to be jumping on the Covid-19 bandwagon. Quite sick actually, the way I look at it.

Paul Scott

17th Apr '20

Thanks welwichia, I appreciate your reply.

I don't say it often enough, but my articles here are just one person's opinion. Sometimes I'm right, and I'm often wrong. It's interesting to discuss things.

Small Cap Value Report (Wed 15 April 2020) - OBR report, BKS, CTP, SOLI

OBR coronavirus reference scenario

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Paul Scott

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