The SIF Folio unpicked: What I do and why I do it

Tuesday, Aug 14 2018 by
85
The SIF Folio unpicked What I do and why I do it

Since launching the SIF folio in April 2016, I’ve added 64 stocks to my Stock in Focus fantasy fund, sold 45 of them, and written 118 weekly columns.

The value of the fund has risen by 41% plus dividends over the last two years. This compares fairly well to a gain of 13% plus dividends for the benchmark FTSE All-Share index:

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SIF is certainly not the best-performing Fantasy Fund on Stockopedia. But what it does offer is a clear set of rules for selecting stocks, a high level of documentation, and as much transparency as I can manage.

Every trading decision I make is documented in my weekly articles. And the screen I use to select stocks is also available for other community members to view and adapt (the Stock in Focus screen is here).

For the last 16 months, I’ve also been buying each new stock selection for my personal holdings. So the SIF fund manager has some skin in the game too!


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Don’t lose money

When I started the SIF portfolio, my goal was to develop a set of rules that would select affordable growth stocks with good fundamentals. I wanted to avoid stocks that needed a lot of individual research, such as special situations and pure growth plays.

At the core of my thinking was Warren Buffett’s first rule of investing: don’t lose money.

The idea was that by avoiding big losers, I’d be able to beat the market without needing to take too much risk.

This may sound boring, but it has worked well so far. The 45 stocks I’ve bought and sold since April 2016 have delivered an average annualised total return of 31% (including dividends and costs). However, I’m painfully aware that my system has yet to be tested in a bear market.

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How my rules work

I’ve received a number of questions about the rules I use in my screen (which you can see here). So I’m going to include these in full, and spend a little…

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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10 Comments on this Article show/hide all

Dunton121 14th Aug '18 1 of 10
5

Hi Roland,

Really good article, enjoying the weekly updates for the SIF portfolio. It is a great example of how to set out your own rules and strategy in a disciplined manner and your breakdown of stocks showing all the stockopedia indicators is very helpful when it comes to doing your own research. 

I've been following lots of the shares included in the portfolio closely, in the monthly reviews it is useful to have comparisons in the metrics that have changed between when you bought the share and come to sell it, learning a lot from this and the more detail you can go into here the better!

Keep up the good work,

Josh

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mmarkkj777 14th Aug '18 2 of 10

Hi Roland. I'm very interested in SIF as I'm especially interested in Warren Buffett''s second rule of investing (dont forget rule one).
I like the fact that its lower risk for medium returns with low maintenance.

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Merlotman 15th Aug '18 3 of 10

Roland
Great article. A couple of follow up questions
Given your preference for companies for strong cash flows it is a bit of a surprise that there is no explicit cash flow related rule. I use OCF/EPS but this has limitations because as far as I can see I can only get a 1 year figure in a Stockopedia screen and I would rather look at this over at least a five year period
It is interesting that you use earning yeild as your main measure of profitability rather than the more popular ROCE and op margin metrics. Assuming a company has no debt, EY measures profitability on market cap and can therefore be heavily affected by share price movements and doesn't necessarily measure how well management is managing capital. IMHO EY is more of a valuation metric.

I have previously had some scepticism with the F score in part because different outcomes can result depending on the data provider used. Also small differences can reduce the score by several points e.g. NXT, which I recall is a personal holding of yours but not in SIF, has  a 5 but very closely misses a 7. On balance I do think that the F score is a good tool but I would use it after I had derived a screened shortlist.

Still not sure that selecting a nine month hold period is optimal but in the absence of an alternative approach seems to work. I am starting to experiment with a dual screen approach. Two sets of rules, very similar but with one screen more tightly derived than the other. The tight screen which will by definition have fewer stocks is used to pick purchases whilst the looser screen (particularly in terms of valuation) is used to determine whether to continue to hold

Like you I am happy to miss out on Boohoo (LON:BOO) and the like as the risks and work in identifying the wheat from the chaff of high growth small caps exceeds the return that you can get from a 'duller' factor based approach. Also agree with you on stop losses. For those looking at the longer term, investment decisions should be based on fundamentals not short term SP movements (unless of course the latter has been caused by the former!)


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Roland Head 15th Aug '18 4 of 10
1

In reply to post #390999

Hi merlotman,

Thanks for your feedback. I'll try and address your points as well as I can.

Cash flow: I always pay close attention to cash flow when reviewing a stock, especially to the free cash flow metrics used in the ValueRank and QualityRank calculations.

One reason for not including it as a specific metric is that as you say, one-year cash flow can be quite lumpy. There's often a good reason for this, so I wouldn't necessarily want to rule out stocks on the basis of one year's poor cash flow.

Earnings yield: I do view earnings yield as more of a valuation metric, but one which indicates the potential profitability (returns) on my investment. My point is for equity investors, valuation and profitability can be linked. A company that's overvalued may deliver below-average returns, even if it has attractive profit margins. As my focus is on a relatively short holding period, I think that achieving an attractive entry point in this regard is important. Over long periods, I agree that ROCE might be more relevant.

F-score: When you're using a data service, anomalies in the data are inevitable. This is true even with a high quality feed such as that the Thomson Reuters service used by Stockopedia.

I do find and highlight such anomalies in my articles sometimes, but only rarely do I think that they change the overall picture on a stock. I can live with the risk that periodically a stock might incorrectly be included or excluded from my screen.

Incidentally, I no longer hold Next (LON:NXT) shares.

Your suggestion of a tight screen and loose screen to decide on which to hold is something I've considered too. I do already have a loose version of my screen which I sometimes use to find buys when the market is roaring ahead. I'm still mulling over whether to use this as a selling guide. I'm not convinced it would improve my returns but have not yet managed to gather conclusive (quantitative!) evidence either way.

Regards,

Roland

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andrea34l 15th Aug '18 5 of 10

Thanks for your latest SIF post. I find all of your blog posts a good read... although I akip through the international shares, as I don't feel able to affordably invest in such companies. I think a well defined set of rules for investing is essential - I don't consider it is easy to figure out for certain the detailed "workings" of many companies, and so a well defined and refined set of rules take a lot of "guesswork" out of investing.

I am currently setting up a few mirror portfolios with certain rule sets and monitoring them over time.

One question I have is with regard to forecast revenue growth, as a figure 'greater than zero' seems quite lenient. In my own mind, if revenue growth trails profit growth then in simplistic terms this seems due to improving margins, reducing costs, realising cost benefits through takeovers, etc. But all of these factors to me do seem to have a finite life span before eventually all of the juice will be squeezed out of them... unless I suppose a company keeps on taking over others and repeating the process. Ideally I would look for forecast revenue growth of at least half forecast profit growth.

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clarea 15th Aug '18 6 of 10
1

Great post Roland aleays pick up a couple of nuggetts from your posrs.

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Peter Craven 16th Aug '18 7 of 10

Roland, Your SIF portfolio has made a truly impressive return of 41% in 2 years (18.7% P.A compound).
Why don't you apply these same principles and become one of the UK's most successful fund managers?

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simonmulford 16th Aug '18 8 of 10
1

Excellent. The proof in the pudding will be how your strategy holds in a bear market.

I am looking for a strategy to cope with a forthcoming downturn, especially since central banks are tightening and corporate bond yields are so low. Any views?

Best

Simon

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skinner66 16th Aug '18 9 of 10

thank you for post and taking time to do,, whether peeps decide on this or not its great to add to other strategy,,i will take on board and and with other advice to tweek what i think is right,, but we are all different investors,, high risk/ low risk.... so depends on the person,,,

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Lawman 17th Aug '18 10 of 10

Mr Roland: What impresses is that:

(1) you adopt a rules based approach

(2) you have the discipline to keep to them. You have given careful thought to the rules. You accept other rules may be useful, but you do not make the mistake of subjectively bending your rules because 'this looks good, but I need to squeeze it past my rules'.

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About Roland Head

Roland Head

I'm a private investor and writer on stock markets, with a particular fondness for free cash flow, dividends and value. I also have an interest in (profitable) commodity stocks.  I hold the CFA UK Investment Management Certificate (IMC). One of my investment interests is developing rules-based strategies such as my Stock in Focus portfolio. This reflects a significant part of my personal portfolio and is the subject of my weekly column here at Stockopedia. In earlier life, I worked as an engineer in telecoms and IT. The rules-based approach required for this kind of work undoubtedly influenced my investing style. I also learned a lot from seeing the tech bubble deflate in 2000-1, when I was working for a large and now defunct Canadian firm.  more »

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