In a recent Blog I sort of hinted at the contents of this particular Blog because it is something that has been playing on my mind for many months and I have only just got around to creating a Blog that gets it down in document form. It has been excruciating because my head has been really buzzing with the desire to write this one but I had other ones to finish and on top of that the sun has been out and I have been messing around with the paintwork on my Z3 again – in essence I cocked up the rear wing for a second time and I just have to get it sorted.
The title to this Blog has been pinched partly from the book, ‘The Art of Execution’ by Lee Freeman-Shor (you can find a copy of this in Wheelie’s Bookshop) although I have probably stretched the true meaning a bit to fit my own view of how I want to run my Portfolio in the future.
In Lee’s book he has various definitions for different types of Investor and these cover the following:
Now my own version of the Connoisseur that I am intending to be more of in the future may get partly close to Lee’s definition although I know I am not so good at the Cutting Losers bit (and I could never be accused of being an Assassin when I have my Bunny outfit on and I’m hoping about the place with my little fluffy tail and a carrot – but we won’t go into that too deeply). I guess if I boil it all down I am talking about a focus on Quality in the Stocks I hold; low levels of Trading Activity and allowing Dividends to compound and help grow the Portfolio with as little effort as possible. I want to hold Stocks that have a strong Track Record over many many years and I want a Valuation case that stacks up whether the Stock is very much a Value play or a Growth play. In essence I must be really fussy about what Stocks are allowed in my Portfolio and once they are in there I must be very reluctant to let them out. Diversification will still be important and I intend to keep my separation between my ‘Normal Trading ISA’ and my ‘Income Portfolio’ (skip over to my ‘Portfolios’ page for more details on this breakdown).
The following Bullets/Paragraphs explore such concepts in more detail:
Focus on Quality and Careful Selection
I have started with this bit first because it is probably the most important element. I want to get hugely fussy about what new Stocks I bring into the Portfolio and I must ensure careful and thorough selection and make sure I am stacking the odds of success in my favour by doing so. This doesn’t just mean improved Annual Returns but should also mean less effort and very low stress. Less really can be More I believe.
Low Levels of Trading Activity
In the main there are three key benefits that I expect from keeping my activity in terms of placing Trades as low as possible. Obviously it means lower Transaction Costs and less ‘work’ to do, but it could also improve my Returns. The lower Transaction Costs is pretty obvious and I have included a link at the end of this Blog to a Blog I wrote some months ago which sort of covers this aspect. In terms of less work if I am buying new Stocks to replace ones that I have sold from my Portfolio (or perhaps they have gone from Takeover Bids if I am really super lucky !!) then that reduces the ‘Research’ that needs to be done. However, in terms of what I do already that probably won’t make a huge difference but a lower level of demands in terms of effort is not something unwelcome.
Perhaps the benefits from a lower requirement for Research is that I will put more focus on the Stocks I already hold in terms of what is going on with them – although that may not change hugely from what I do currently as I do see advantages from just letting my Stocks ‘do their thing’. I see it as very possible to do too much work on your Stocks and to worry about them too much and you end up hurting your Returns because if you obsess about looking for problems then you are almost certain to discover some and this could lead you to sell a great Stock too early when really it is just yet more ‘Noise’ that you have created in your own mind.
Often it is best to just leave your Portfolio alone and stop dicking about with it.
I am definitely leaning towards the view that ‘Less is more’ when it comes to doing way too much stuff to your Portfolio. So often I hear anecdotes about 90 year old Investors who are massively wealthy in essence because they bought great Stocks in the first place (often by accident !!) and they just left them alone for 50 years and the Stocks grew in both Capital Value and compounded Dividends. I also hear people say things to me like “I had to work overseas for 6 months and I couldn’t look at my Portfolio and when I got back I discovered that my Stocks had done really well and I am so pleased. In fact, they probably did better than if I had been here and tinkering with them.”
And of course I keep saying it myself that my biggest mistake in Investing over many years has been to sell great Stocks too early. There are countless examples where I sold a Stock at what seemed a decent Profit at the time but if I had just held them I would have made massive Returns on Capital and made even more from the compounded Dividends. More and more I realise this.
It might be that my Returns do not improve and that I would do better to be more active but I see a trade-off in that I am happy to get lower Returns as long as they are at an acceptable level and as long as it frees me up to live my life and do the fun stuff I want to be doing. I see this as increasingly important as I get older and of course there are health considerations to throw in at some point but hopefully I have many years to come before my health gets to a situation where I do not have time to do my Investing stuff effectively.
I guess mainly for Risk Management reasons I see Diversity in my Portfolio as hugely important and achieve this in many ways such as by Number of Holdings, Sectors, Strategy type – Value, Growth, Income, Recovery, etc. – Market Cap, Geography. This is a key way to lower the overall Risk in my Portfolio and although I regularly consider reducing my Number of Holdings, I am pretty settled on having the WD40 and then up to 15 Stocks in my Income Portfolio. I do think about dropping down to 30 in my Main Portfolio but I am not getting a huge urge to go this way.
I think having a high level of Diversity across many different aspects can help to reduce any psychological stress about my Portfolio and help me to make calm and well thought through Decisions. It also allows me to go off all day to the Pub and not to worry at all about my Positions and I sleep very soundly (especially after a few Beers !!).
I occasionally get people contacting me who are all stressed out and worried and not sleeping and stuff and nearly always this is because they hold a Portfolio comprised of very few Stocks and the ones they have are extremely low Quality AIM Junky things – that is certainly not the kind of Approach that interests me.
I will no doubt Hedge my Portfolio from time to time in order to take out Market Risk and at the time of writing this I am quite heavily Hedged (probably too Hedged to be honest) due to the Risks that I foresaw for 2019 around Brexit and I am happy to keep this stance at the moment. However, any Hedging is not something to be undertaken lightly and I intend to think long and hard before any Hedges are placed in the future. Hedging has the major benefit that it avoids me having to Sell Stocks (or parts of any Position) from my Portfolio when I am concerned about the overall Markets going a bit smelly. Holding onto great Stocks and letting them do their thing is a major part of my Approach so I see Hedging as very useful. Once I have built a Portfolio of High Quality Stocks for the Long-term, I don’t want to keep selling bits out of it just because I think a Market Downturn might be coming – that is what Hedges are for.
Strong Balance Sheets
Recently I produced some Blogs which were Checklists for several different types of Stocks to help with careful Stock choices and use of these would help with Quality but one critically important aspect of Quality Businesses is to have strong Balance Sheets (in essence little or preferably no debt) and I will ensure a clear focus on this with the Stocks I consider. You can find the Checklists at the end of this Blog.
Strong Sustainable Growth
This one is quite subjective because of course we cannot know the future but my approach will be to think carefully about possible future opportunities for Companies I look at and of course a strong Track Record of growth over time will be a key element of the decision. This aspect is slightly less important on Income Stocks but even these should be achieving perhaps something like at least matching inflation in terms of Revenue Growth – without this they will most likely struggle and become a future problem for me.
My attention will be more upon Stocks that have shown steady and fairly consistent growth over many years rather than the sort of Stocks that are growing extremely rapidly and are therefore likely to fizzle out at some point.
Such Track Records of steady achievement will rule out most early stage Companies and ones with only a few years of success behind them. I would far rather hold boring but well entrenched Companies that I can just park in my Portfolio and ignore than Stocks with significant potential to do well but also with considerable potential to go very badly wrong and quickly. Steady and consistent growth in Dividend Payouts will be a key factor I look at.
This is not something that I will get too hung up on although it is important and I don’t want to pay crazy Prices for anything. There will be ones that are obviously Value Plays but of course I need to be mindful of the potential to stick my little fluffy tail in a Value Trap and for Growth Stocks I need to focus on Growth Rates and the PEG Ratio (Price/Earnings divided by Growth Rate – below 1.0 is seen as cheap). When it comes to Selling I do not see Valuation as a good reason to dump an entire Position these days but if something does run away I will probably be considering a TopChop.
In essence I see Quality of the Business as trumping the vast majority of Valuation concerns.
It would be easy to read this Blog and wonder what I will actually be doing differently. Well, not a lot really !!
It boils down to 2 things I guess – a relentless focus on Quality of what I am buying and being much more reluctant to sell Stocks once I have them. This latter bit is of course very much like my approach has been for the last year or so but that has really been brought on by concerns I have around Brexit and the Markets in general which are making me very cautious. However, as a general thing I want to be far more fussy about what is allowed into my Portfolio and once it is in there I don’t want to let it out.
It’s also possible that a focus on Quality which has Track Record as a major part of it rules out buying Stocks which are for fairly new Businesses. In the main this is not a problem as many newer Stocks regularly have hiccups and turn out to not be so good over time but I will still consider newer Growth Companies if I have a strong level of conviction but in the main I am less likely to go for such Stocks.
In terms of my current Portfolio I don’t foresee much need for tweaks – I have the odd irritating one but even these I think will work out eventually and I am happy to give them space. I have some Cash kicking around and there are a few Stocks that interest me but with the current Market mood I see no need to buy anything.
OK, I think that pretty much captures my current thinking on how I will structure and manage my Portfolio in the future. To enhance what I have written here the following ‘Related Blogs’ should help.
Regards, WD (and thanks for the therapy session).
This one looks at Costs involved and timing considerations etc. around selling your Stocks and moving into Cash in anticipation of a Market Sell-off. For most Portfolios sizes it is probably not worth the effort. This is for the final part and there are links at the bottom for the earlier bits:
The definitive guide to Hedging although I began to hate it !!
The Power of Compounding:
These Blogs look at Diversification:
This Blog looks at how many Stocks we should hold:
These Blogs look at Position Sizing – some of the first I ever produced but still probably worth a read:
Here are the Stock Buy Checklists – this is the final one but at the start there are links to the other 3:
Here are the valuation Blogs I wrote – without doubt one of the most important things I have scribbled. Again links to earlier parts are at the bottom:
These ones go on about TopChopping and stuff – again links to the earlier parts are right at the bottom:
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