To be quite frank (no you’re not, your name’s Wheelie !!) at this precise point in time I don’t really have a complete answer to my Question although I am sensing some Tweaks to my Portfolios that may get me nearer to where I probably need to be. This Blog hopefully will explore the issues and the process of doing so will help drive me to the right Decision - maybe Readers will even benefit as they can consider their own Portfolios in light of the topics explored.
- I follow the Legend that is Cockney Rebel (Richard Crow, @RebelHQ on Tweets) and am constantly amazed by his Investing/Trading Results - I think I saw just lately that he is up something silly like 60% so far in 2015 !! It got me thinking - what am I really doing differently? One of the factors that stands out is that Cockney Rebel seems to hold fewer Stocks (although I suspect he may have around 30) but the main thing is that he seems to hold many Cyclical Stocks - lots of Retailers and Housebuilders and related stuff - it strikes me he very much Trades with Sectors and crowds into them without holding other more useless Sectors (ones that are going down or perhaps just sideways). This ‘Concentration’ on Sectors seems inherently risky but for someone like myself who uses Active Hedging via FTSE100 Shorts it may be nowhere near as risky as it may at first appear. It is obvious that Cockney Rebel is an extremely gifted Stock Picker but I do not think that is the defining factor - in other words my Stock Picking skills are probably roughly good enough - it is more about my application of those Skills in a Portfolio - it is Position Sizing and Risk Management actions. My approach up until now has tended to have a bit in almost every Sector - but this might be an error as I will explore below no doubt. From listening to Podcasts that Cockney Rebel has done with Paul Scott, I get the impression he ‘trades’ a bit around his Longer Term Holdings but I am not sure if this is included in the Results I have seen for this year.
- As I hinted at above, my Active Hedging using FTSE100 Short Spreadbets and XUKS tends to reduce my Risk that comes from Market Falls - and this is really the Risk that concerns me the most. Experience tells me that the kind of Stocks I buy in terms of their Quality and Intrinsic Risks tends to mean that across my Portfolio there is a large amount of ‘Natural Hedging’ on a day to day basis - where the failings in some Stocks are more than made up for by gains on others. The Risk that I really lose WheelieSleep over is that arising from a general Market Collapse - a proper Grizzly Bear Market. However, the sad reality is that Stocks are extremely closely correlated with one another and having a Diverse Portfolio across many Stocks and Sectors will not really save me from this overall Market Meltdown Risk - it might help to a small extent but that is all. So perhaps I can reduce this Diversity across Sectors to focus my Returns better and use Active Hedging to save my arse.
- Despite all my careful spreading of Stocks across Sectors etc. I actually find in practice that my Shares are incredibly closely correlated - in fact, everything I hold including Overseas Unit Trusts are really very correlated - Stocks, after all, in practice do appear to be Stocks !! Sometimes I wonder if I should just sell everything and just go Long or Short the FTSE100 in a big way !! In other words, I have huge Correlation Risk anyway - so why not focus it a bit more and hold Fewer Positions?
- Perhaps a more pressing ‘problem’ arises from the Performance of my Unit Trusts this year. My ISA is absolutely flying at the moment and my Income Portfolio seems to be plodding along nicely with gains just very slowly driven by the Dividends - as it should be I think. However, to put it bluntly, my Unit Trusts really are crap. So far they are up a few Percent and they do not pay any Dividend - so what is the point of them? I suspect that a lot of it is down to FOREX Risk with the Quid Sterling being Strong against the Euro and the Dollar - but that is irrelevant really and the fact is that Performance sucks. The Health Fund and the Tech Funds give me specific exposure to Strong Sectors so I am likely to stick with them (or switch to similar Investment Trusts) but the European Growth Fund and the US Growth Fund are just not cutting the moutard. Part of my reasoning for holding these Unit Trusts is as a Hedge against my own incompetence - but the sad reality is that however incompetent I seem to be, the Fund Managers are clearly more incompetent - so I am increasing my Risk by holding these Funds rather than reducing it. Quite shocking really that a bloke with a 10inch Netbook running Windows XP, a subscription to Investors Chronicle, a ShareScope Licence, an ADVFN app and a couple of small Tablets can outperform significantly these highly paid Professional Fund Managers………Since writing the previous text in this bullet point, I have now come back to the draft with a fresh perspective and I have to admit that my Unit Trusts have performed pretty well in the last 3 weeks (although in reality they are still lagging behind my own performance to a huge degree), so maybe they do have value - it is not making any decision to reduce them easy.
- My current view is that investing via funds is very different to investing via Individual Stocks. Fund Investing is about having % asset allocations and then rebalancing and having a Spread of Investments over many Asset Classes - you are not picking Winners. Trying to pick winning or losing Countries or Asset classes is impossible - e.g. China, Japan etc. You cannot predict performance of Stockmarkets because it is impossible to value them (although the ‘Experts‘ will blind you with all sorts of clever Valuation Metrics), whereas with Stocks you can get a very good idea of Valuations and these can be an excellent predictor of Returns - Low Valuations lead to high returns. As such, investing via Funds makes little sense for someone like myself except to get exposure to areas where I have little skill or inclination myself - e.g. My Health and Tech Funds which do make some sense.
That’s it for Part 1, the next instalment will look closer at my current Portfolios in terms of their make-up and also look at whether I am Trading too much or not and, if so, what can I do about it?
You can get more clarity on what I am currently holding under the ‘Portfolios’ tab on this Website.
Wishing everyone a great week, WD