Thoughts from a 3rd year Apprentice Investor

7th Nov '15 by jimbobjames2002

15 comments 14116 reads

Hi there, as long time stockopedia fan I recently felt compelled to write a blog on my experiences throughout a turbulent, exciting and at times painful 2015. I've never written an article here before, so bear with me if I go off topic or show some naivety along the way! I know we're not at year end yet, but I felt like writing this while it was fresh in my mind. So without further ado, here's a brief summary of how my investing year has gone, warts and all (gulp!).

The bad news first...

It would be much easier to start by listing my biggest winners and success stories, but let's face it - we learn so much more when we lose and I had my fair share of losing early in the year. It definitely feels like my year could be split into 2 parts; the first 3 months from January to March (which didn't go well); and from April to now (which have gone much, much better). All of which is rather at odds with how the markets have performed, since the biggest gains were generally seen in the first half of the year.

My biggest loser - Tungsten (37% loss)

I'll admit I got overly excited by Edi Truell's overly complex, cash burning Tungsten. At the start of 2015 I was convinced it was going to be huge. I got emotionally attached and couldn't see the wood for the trees. I invested almost 10% of my portfolio and got stung badly. What hurt most was having to admit to myself that I was wrong and the army of shorters were right all along. However, my biggest mistake was also my biggest lesson and I'm actually glad I that I made it (although at the time I was tearing my hair out and certainly wouldn't have agreed with that statement!). Losing the ego is something I keep reminding myself to do regularly.

My 2nd biggest loser - Synety (49% loss - a bigger loser in percentage terms than Tungsten but a smaller holding overall)

With Synety I got ahead of myself too. Unlike Tungsten, I think Synety may still be a good investment in the not to distant future, but I got my timing badly wrong and the management's decision to have a heavily discounted placing left me with a significant loss. The old adage 'The second mouse gets the cheese' still may…

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Richard Goodwin

8th Nov '15

Congratulations on having such a good year and writing such a lucid explanation James. I think you are being modest in titling yourself a third year apprentice! I first sat with my Dad looking at the Unit Trust listings in the newspaper when I was 12 and have been fascinated by investment ever since but my experiences this year aren't very much different from your own.
I still struggle to restrict myself to high stockrank shares (or to sell as stockranks fall) because either [A] I like the growth/recovery story (eg £HCM), or because [B] I strongly believe that the underlying business is excellent and have held for a long time (eg £WTB), whatever the short term stock rank characteristics of the share price. Sometimes it is simply that there hasn't been a decisive event to crystalise the decision to sell (eg £DEMG).

I am fully aware of low statistical probability associated with [A] and the behavioural risks of falling in love with a successful holding of [B]. My self-justification revolves around minimising portfolio churn with its associated costs. It remains a psychological battle though as my real interest is in business, entrepreneurship and strategy rather than finance so where's the fun in simply following stock ranks? I find the SCVR a useful anchor!

Having said this, my biggest success in recent years was recognising that biotech was too cheap a few years ago. I don't claim any expertise in valuing biotech but value seemed clear. To take one example the market cap of GW Pharmaceuticals (LON:GWP) was less than the amount of capital invested in it over a prolonged period - and yet there had been no failures. A share like this will never have a high stock rank as it fails on quality and value. If only I'd invested more! The current big question is whether commodity producers are yet at that stage. There are some negative market caps but it doesn't quite feel like the bulls have given up yet.

One action which helped me recently was to physically write down the reason for owning each share within the portfolio (eg sales growth, turnaround, margin expansion, high and growing dividend) and then to use numbers from Stockopedia to validate this rationale. For example, for a "sales growth" stock then what is the 5 year CAGR of sales? Is it above 10%? Most results were as expected but there were one or two surprises which gave me food for thought.
Anyway, thank you for posting and happy investing.
Richard

Tom Firth

Great performance James - many a fund manager would do terrible things for 14.6% YTD over a period that has seen the biggest downturn for years...

Particularly impressive, in my view, is that you recognised your own mistakes from the early part of the year and made the tough call to admit that sometimes the machine knows best - and look at the difference that made! Not everyone can do that.

Tom

"It remains a psychological battle though as my real interest is in business, entrepreneurship and strategy rather than finance so where's the fun in simply following stock ranks?"

I really know how you feel there! For a long time a lot of the original appeal in investing for me was simply that I love learning about the companies, their strategies and so on. I realised that I prefer winning though...

I do think there are times (namely bear markets) where irrationality is high in the market and it is easier to identify mispricings but most of the time the StockRanks and similar just work better for me.

Tom

jimbobjames2002

Thanks for the kind comments guys, all really appreciated. I agree that writing out the bull and bear case for an investment is important. Since last year I've been keeping a trading diary which helps me no end. It's great to refer back to why I made the decisions that I made in the past and hopefully learn from them in the future.

Also, regarding fund managers - I guess that's the point isn't it! If I can't beat them then why bother taking a more proactive approach as a private investor? I much prefer the flexibility we have as a PIs that fund managers don't have when making investment decisions.

Thanks, James

The Phoenix

Well done James you seem to have developed the habit of averaging up not down out of interest do you now use stops and if so what percentage.

Regards

Andy

Hi Tom, I have absolutely no doubt that you are right on all counts. That's the problem!

AstonGirl

James- thank you very much for sharing your years highlights & lowlights. Like you I swallowed the story on Tungsten (LON:TUNG) & have kept a few in my portfolio (at a big loss) to remind me not to make the same mistakes again!
Your successes are applauded and I very much enjoyed reading your post.
I hope you'll update us again in 6 months time, AG

shauniekent

9th Nov '15

As much as i enjoy reading articles by some of the experienced investors, i love to hear from those less experienced such as yourself. I'm probably at a similar level of experience and recognise myself in this post.
I've not doubt you(and myself) will become successful LT investors if we review, swallow and learn from our mistakes.

My most important lesson this year: Do NOT fight momentum. Don't buy a downwards chart. For these reasons i wont buy commodities related companies yet, but at some point will (nb my exception is oil companies but again time will tell if im ever wise enough to disregard the stock ranks).

Novice Investor

Sadly the Stockranks haven't a long enough history to do much meaningful back testing. We may be seeing the momentum of Stockopedia readers buying of high Stockranks; I really don't know. What I do know, is that you don't get much in life without some effort. Can an investor really continue to get way above average returns by choosing high ranked stocks, with the main effort being the selection of uncorrelated stocks?

We'll all find out in the next few years.

NI

LE4R

Hi James

Many thanks for your insights. I can't emphasis enough how useful this sort of commentary is for someone like myself - who is at an even earlier stage in my investment foray, having participated in the market to date predominantly through funds.

I say predominantly as my first shares were bought a number of years ago, following friends into some crazy oil exploration companies. Well... need I say how that turned out! It hurt but the positive, as you noted, was that I lost my ego - quickly! This time I intend to research (not punt) and to be much more disciplined in my thinking and learning of lessons. The trading diary you mention is already something I had on my list of must-dos.

I note that you say that you don't have a particular investment style - but could you expand a little on how you find your high conviction stocks? Having read a number of investment books, and reading a number of columns, the one commonality is that there is no commonality to approach! The problem is less of how to find a worthy stock; it's more a case of how to find your own way to find such a stock. How did you happen upon your style?

Thank you in advance for any further thoughts.

Lawrence

PhilHofGrowYourDough

Hi NI,

"We may be seeing the momentum of Stockopedia readers buying of high Stockranks"

That's true we might however I select mainly Euro and US stocks smattered with a two or three UK stocks and whilst I don't primarily select based on StockRank I always end up buying stocks that have a stock rank of 90+. I don't see any Euro/US stock discussions here so I doubt that Stockopedia users are distorting the performance of my selections.

"Can an investor really continue to get way above average returns by choosing high ranked stocks, with the main effort being the selection of uncorrelated stocks?"

I'd suggest the effort is putting aside one's ego and being disciplined in one's approach rather than kidding oneself that you know everything about a company, its management, its products, its business model, its competitors etc... For me that suggestion is plainly ridiculous and in fact a waste of my time and investment capital (as my track record using this approach is average at best). This has been my single biggest piece of learning.

Holding 20 stocks across 9 countries and various sectors I'd only be able to tell you roughly what they do, e.g. Olainfarm is a Latvian pharmaceutical company. You might consider that to be a disadvantage however when the stock starts to get ugly I won't have the PR from CEO in my ear convincing me to hold on. That makes it easy to sell the share and move on.

Best of luck with your investments

Phil

Very interesting post Phil. I absolutely agree that we can't know everything about a company. Focusing on small caps can make it easier to learn much more about a company than the big boys however. David Stredder's model of getting close to management and valuing the quality of the people as much as the story and numbers, seems to work. TMF Pyad used to say he focussed on the numbers and didn't care, and often didn't know what the companies did. While I never believed that, he too was emphasising that the numbers matter far more.

As we all now know, it's the performance of the high ranked stocks as a group that is relevant, rather than individual stocks. I'm just wondering, given that the Stockranks don't change very quickly in response to results, whether people actually achieve the figures that the recent term data mining suggests.

I subscribe for the screening facility, and have yet to buy into the high Stockranks philosophy. Still, I'm keeping a close eye, and another two or three years of data may convince me. Reading the OP, I'm wondering how he would have done had he traded strictly on the stock ranking of those stocks.

Regards,

NI

"David Stredder's model of getting close to management and valuing the quality of the people as much as the story and numbers, seems to work"

I'm sure it doea work for David, but you have to ask yourself (and be totally honest) ... Do I have the business nouce of David Shredder (not that I've met him)? Do I have the time that David has to do that research or am I merely paying lip service to it?

"I'm just wondering, given that the Stockranks don't change very quickly in response to results, whether people actually achieve the figures that the recent term data mining suggests"

Here's a link to my fantasy fund where the selection and weightings are closely linked my personal investments (sadly not the overall size) ... http://www.stockopedia.com/fantasy-funds/philhs-fu...

Since I switched to a more Naked Trader / QM approach in Spring 2013 results have been dramatic. From Jan 2013 to date my consolidated investments are up over 90% and this isn't from an overly concentrated portfolio. I'm guessing I would have been holding 15 to 20 selections across the portfolio during that time. From Jan 2014 I'm up 42% and from Jan 2015 I'm up 17%

Best of luck
Phil

Agree the sample period for StockRanks to date is too short to be conclusive but two points:

1 - the StockRanks are based on/similar to research by many others and such strategies have been backtested with excellent results over decades. I would be very surprised (but it's not impossible) if the StockRanks didn't produce similar backtested results to other tests. Who knows what the future holds though.

2 - By screening for all stocks with a StockRank of 90 and above and then exporting the list to excel to sum up the market capitalisations, I can tell you that the total market capitalisation of all stocks ranked 90+ is just under £96 billion. Do the StockRanks really influence enough capital to move the needle on that kind of money? I don't know but that seems unlikely....for now.

Even by taking just the smaller companies from that list (which site users do seem to prefer) under, say, £1.5 billion, the market capitalisation is £34.2 billion...still a lot of capital to influence.

Tom

Edward Croft

Jimbob - thanks for sharing your journey over the year. I thought your comments about how much the community has helped were wonderful. Really glad the StockRanks have helped - even if it's been in a round-about way.

I think we can do a much better job of bringing the community mind together on the site - it's a huge untapped asset - there are so many smart people lurking on this website. It would be great to encourage more contributions amongst the comments.

We're in the process of completely rebuilding the site and rebuilding the community is a focus. We're going to be providing better categorisation of the forums, which should make it easier to discover new posts, and we'll be providing an improved notification system which should speed up the rate of conversations.

Any ideas would be very welcome.

Thoughts from a 3rd year Apprentice Investor

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Jimbobjames2002

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