New Sunday Times Feature - Diary of a Private Investor

[Colm Fagan]

Thanks @redartbmud I defer to what I suspect is your greater knowledge of accounting. Despite our claims at times to understand accounting (and everything else besides), we actuaries (or at least this particular one) can get confused by technical accounting issues, so I'm lost on some aspects of CT's accounts.

A few things stand out for me, however. One is that, despite shareholders contributing £17.6 million in new money last year, borrowings still increased, from £66.2m at end 2017 to £80.9m at end 2018. As an aside, I see that Bank of Ireland is one of their bank lenders. I was also flummoxed by the sudden appearance in the balance sheet of a £13.5m liability for "trade and other payables", consisting primarily of what's called a "Deferred lease liability". There was nothing under this heading last year. I don't know the significance of this. Maybe there's an equally obscure asset on the other side of the balance sheet.

Another interesting technical aspect of the accounts is a reference to IFRS 16, which is being implemented from January 2019. They say that "we expect there to be a material change in the balance sheet on adoption". How material? They also state that "this new accounting standard will have a significant impact on the Group's consolidated financial statements, including but not limited to EBITDA and profit before taxation." How significant will the impact be on the P&L and in what direction? If you or anyone else with accounting expertise could translate all of this into plain English, I would be obliged.

All in all, I'm glad I sold my shares. I wonder if Lord John Lee is sticking with them after writing in the FT about how low the price was - before his article appeared, that is! I'm convinced that his intervention made the difference for me between it being a so-so investment and a very good one. Having said that, while a 25% profit looks good, I only ventured a small stake in the company, for the reasons stated in my article, so the actual cash gain wasn't fantastic.

The experience has made me think how wonderful it would be to have the power to move share prices with my writings. It could open up all sorts of new opportunities for profit Give me time!

 

[redartbmud]

On a previous topic:
There has been a reaction to the recent Investor day at Renishaw, one of your favoured stocks.
Investec now rates them as a sell.
The company continues to be an innovator and market leader, but the stars do not appear to be aligned on their horizon for the present time.

red

 

[Colm Fagan]

On a previous topic:
There has been a reaction to the recent Investor day at Renishaw, one of your favoured stocks.
Investec now rates them as a sell.
The company continues to be an innovator and market leader, but the stars do not appear to be aligned on their horizon for the present time.

red

Hi Red
I agree. I too was at the Investor Day. I know nothing about Renishaw's business, so presentations on new products go over my head. In the past, I felt like saying "Wow" occasionally, the inventions were so exciting. The "wow" factor was missing this year. The inventions seemed mainly to be enhancements of existing products. OK, an invention that allows a 3D part to be made three times faster may be very valuable but it doesn't bowl me over. It could also be that there is something wonderful in the offing, so secret that nothing could be said about it at the Investor Day.
I'm no longer a buyer, but I'm not selling either. It's a good company with good people and lots of money in the bank. I'm confident that it's still a good long-term buy, better than bonds over the next five to ten years, but probably won't deliver my target return of bonds plus 4%. A further consideration in my decision not to sell is that it would leave me with a massive CGT bill!

 

[Gordon Gekko]

I know nothing about Renishaw's business

Hi Colm,

Is that not a terrifying admission? You know far more about markets and investing than most people, but my fear is that, like most people, you too are like a lamb to the slaughter in that your portfolio is too concentrated and you don’t have the resources to research the companies. Would you not be better off playing golf and drinking red wine whilst your old pals in ILIM or elsewhere manage an equity mandate for you? It is a genuine question.

 

[cremeegg]

Would you not be better off playing golf and drinking red wine whilst your old pals in ILIM or elsewhere manage an equity mandate for you? It is a genuine question.

But where would be the fun in that. Apologies to Colm for interrupting.

 

[Colm Fagan]

@Gordon Gekko Reasonable questions. You're right: I know nothing about Renishaw's core business, metrology (the science of measurement), but I am very familiar with how Renishaw does business and its values. It believes in taking a long-term view, through thick and thin. Every year, it invests 15% of revenue in R&D. That has paid off over the long-term. My original investment of 20 years ago is now worth around 10 times what I paid. That equates to a capital return of 12.2% a year. Add another 2.5% or so a year for dividends. I don't think they'll match that in future, but I still believe in their approach to doing business. It's how I'd like to run a business.

As for the dangers of a concentrated portfolio, I have been banging this drum for a long time. See for example Diary Update 11 ("The Virtues of a Small Portfolio") of 9 February. I attach a copy of the update. The concentrated portfolio has delivered long-term returns well in excess of those produced by ILIM or any of the other major investment firms.

Would you not be better off playing golf and drinking red wine

I don't play golf, but I do like the occasional glass of red wine. There was lots of it on offer - for free - at the Renishaw Investor Day! As for the time commitment, it doesn't take much effort to keep on top of a concentrated portfolio. I only have to keep a weather eye on a small number of stocks. I look at them in detail only once a year, sometimes less often. That's not a significant overhead.
@cremeegg is right: I really do get lots of fun from investing - and writing about it. Maybe I'm just sad. Strangely enough, by managing my own portfolio I'm able to sleep much better at night than if I were relying on an institution to look after my money. For example, at the end of 2018, the portfolio's value had fallen significantly, but as I wrote at the time I wasn't particularly worried as I knew that some of the shares were being ridiculously undervalued by the market and that they'd eventually come back, which they did.

 

[redartbmud]

I feel a little guilty, setting off the rabbit, to run across the fields, then disappear for a short break.
As a long term investor in Renishaw, I understand a bit more about the company, and the business, every time I attend an Investor Day or AGM.
I fully endorse Colm's present views on the status of the business, and his current position. I am holding, but not adding, for the short/medium term. The current state of the world economy will temper growth until such time that we see something new.

The advantage of holding a limited number of shares, in a portfolio, is the amount of time available to hold a watching brief over your investments. Advances in technology have made available considerable quantities of data to sift and digest.
Unlike the 'good old days', when markets moved more slowly, it is vitally important to keep a daily watch for company announcements, broker comments, newspaper articles. Investment forums, where private investors can post their views, can be short term disruptors, should they create short term momentum, either up or down. Programmed trading, using algorithms, have the capacity to create irrational volatility.

The corollary is however, that a larger number of holdings creates a greater risk because the investment is spread more widely. Assuming that you double the number of holdings from 10 to 20. Only 5% of your total investment is held in 1 share. The question is whether share No20 on the list, is as strong as share No10, and that it will generate similar returns. An interesting conundrum.

red

 

[elacsaplau]

Hi Retardmud,

Good of you to revisit us! I note that you have a very particular and singular attachment to this thread. And why not! - it's not every day that you'll cyber meet a fellow long-term investor in Reinshaw, who travels to attend its AGMs, has mirroring views on its current prospects and is a passionate advocate of the concentrated portfolio with both feet very firmly in the "diversification is a protection against ignorance camp"!!

In case that an overly comfortable consensus takes hold, just for balance, I'd like to record that there are alternate views which include:

1. Most professional fund managers do not beat the market in the long-term;

2. It is hard to understand why amateur investors generally would be more successful than professional fund managers and by extension even less likely to beat the market in the long-term;

3. Keeping a daily watch of market noise is generally a waste of time and one should be encouraged to find other areas of interest like philately or pilates or something; and

4. There is Noble Prize winning research that would disagree with the general point that "a larger number of holdings creates a greater risk".


Please don't take this to mean that it is not possible for individuals to beat the market. Hell, I've taken bets myself that have paid off handsomely. But it really is hard to tell to what extent such personal investment successes were primarily down to luck. For the majority of people the majority of the time, I am not at all convinced of the merits of the concentrated stock-picking strategy which is central to this thread.

For the avoidance of doubt, I do believe that Colm has beaten the market - I am just concerned with the central messaging and that some people will suffer as a result of it! There needs to be more of the Blue Peter messaging....

 

[Sarenco]

The corollary is however, that a larger number of holdings creates a greater risk because the investment is spread more widely

With respect, that is complete nonsense.

A concentrated portfolio of securities is always more risky than a more widely diversified portfolio.

 

[redartbmud]

Hi Sarenco/elacsaplau


Firstly, an apology.
I meant to say that " a larger number of holdings creates LESS risk....". The greater the spread, the lower the risk. In my simple case study a 20 share portfolio suggests a holding that, at cost, equates to 5% of the portfolio, compared to 10% of a 10 share portfolio.

I agree with you on the professionals. Pressure of business once meant that I gave my portfolio to a Broker, to manage on my behalf. It did not end well!! The whole episode could be the subject of a Diary column.

Any long term investor, who says that they have never had a disaster, must be economical with the truth. Over my years of investing, I have had a number. My aim is to ensure that the percentage of losers, or underperformers, is vastly outweighed by the winners.
There are many publications that show charts that compare performance of the markets vs cash. It is important to understand the underlying assumptions behind the figures, and of course the start point and time span. The fundamental fact remains that income plus capital growth will always outperform income alone, over a long enough economic cycle.

Every investor has their own set of criteria. Some have greater aptitude than others. Sadly, far too may gamble on spread bets, CFD's and other very risky investments, only to retire with a big hole in their pockets, down which their funds have disappeared.
My personal goal is not to beat the markets, but to generate sufficient long term growth and income from my assets, to maintain a standard of living that meets my needs. Unlike Colm, my personal portfolio is far too diverse, and I do not treat all of the content, with the attention that is required, all of the time.

Turning to the column, I find it an interesting, and informative, walk through the world of investing. Both good and bad are reviewed, for what they represent, and generate thought and ideas. It is important to stand back, from time to time, and take stock. The old "cannot see the wood for the trees" springs to mind.

It is a coincidence that Mr Fagan share a similar love affair with a remarkable business, such as Renishaw, but I do not share his devotion, for example, to Ryanair. I am however interested in his opinion.

I have been a reader of Diary of a Private Invstor for some time, but have only recently become a commentator/contributor.
Long may he continue to pen his musings, and create a debate, from which we may all take away a small amount of knowledge, and maybe the odd success story.

red

 

[joe sod]

Unlike the 'good old days', when markets moved more slowly,

Programmed trading, using algorithms, have the capacity to create irrational volatility.

Im surprised there is not more analysis of these crucial issues in markets today, how technology moves markets and increases volatility. Look at the huge sell off in december, largely explained by the above. Even when volatility is low in the overall market, it can be high in individual stocks, ryanair falling 10% on little specific news recently. I think the capacity for investors to be spooked out of markets today is much higher than in the pre internet days.

 

[Sarenco]

And yet the last decade has been the least volatile in stock market history.

Reality does not conform to your thesis.

 

[Gordon Gekko]

The more I see, the more I welcome private investors buying ETFs rather than active because it gives sensible investors an advantage.

The greatest value that an investment manager can add is the conviction to stay the course.

Cheap ETFs are all well and good, but most people who invested in them ran for the hills in December.

 

[jpd]

The more I see, the more I welcome private investors buying ETFs rather than active because it gives sensible investors an advantage.

apart from the 41% tax

 

[joe sod]

And yet the last decade has been the least volatile in stock market history.

Reality does not conform to your thesis.

I think what we saw in december with the huge selling and then the very fast recovery in january is not what has been seen before, some of the selling in december was worse than 2008. Even on this site where there is not much discussion anymore there were a lot of people that had sold their holdings because this was the big crash they had been reading about on investment blogs. I think technology and too much information is definitly a big factor moving markets

 

[Andrew365]

I remember January 2016 being pretty bad for the S&P before recovering to highs come mid year deja vu.

Something that stuck with me from a podcast years ago and it is the value of your own time. In a Simple example let's say I invest passively and earn 5% or I can pick individual stocks via research in my free time and earn 8%. However is that 3% worth the time I have spent earning it or could i have done something else. Personally for me in my position it has so far I have picked the passive strategy due to work and hobby commitments.

 

[joe sod]

n a Simple example let's say I invest passively and earn 5% or I can pick individual stocks via research in my free time and earn 8%.

and unfortunately with investing that extra work could worsen your performance, your assumptions and calculations could be wrong. Even if you research a company to the nth degree you still can be just wrong.

 

[redartbmud]

Some interesting posts recently.
The Column is titled Diary of a Private investor, and that may give a clue as to the content.

Gordon/joe
Do you advocate that it is a waste of time to be a DIY investor, and that the best course is to invest indirectly through
products such as ETF's, UT's, IT's etc?
The number and spread of such vehicles is now so huge that you are spoiled for choice. How do you apply filters to select
the fund, in which to invest? The principle is the same as selecting a share., you are relying on the published data, both historic and
future forecast, consequently it is easy to make a mistake when making the choice.

 

[Colm Fagan]

A few responses to the various postings, which I hope will clear up some misunderstandings about my approach to investing. It's worth stating at the outset that I'm speaking for myself. I can't speak for other private investors.

Most professional fund managers do not beat the market in the long-term;

Yes, the statistics are firmly against active investment. I read recently that there is only a c1% chance that an active fund will beat a passive fund over 10 years. The great investor Warren Buffett advises "normal" investors to buy passive funds. I recommend the same to anyone who asks my opinion. I'll explain below why I prefer an active approach (or what I prefer to call a "passive active" approach) for my own investments.

Keeping a daily watch of market noise is generally a waste of time and one should be encouraged to find other areas of interest like philately or pilates or something

That's probably true too, but it doesn't apply to me. I have a highly concentrated portfolio (five companies account for over 80% of my holdings) and I make only small changes over time. Four of the five top holdings at end May 2019 were also in the top 5 in May 2016. The proportions in different companies within the top five have changed over time as I've become more or less optimistic about their prospects. Those small changes have generally made positive contributions to performance. It's not time-consuming to keep tabs on a highly concentrated portfolio that changes little over time.

There is Noble (sic) Prize winning research that would disagree with the general point that "a larger number of holdings creates a greater risk".

It depends on the definition of risk. It's obvious that the more concentrated the portfolio, the less likely its performance will track the broader market. It's not so obvious that the risk of loss is greater. My most concentrated portfolio ever was when I owned 100% of my own business and had very little else. I was confident the business would succeed. I didn't believe I was running too much risk. I felt much the same about four years ago when I had a sizeable portion of my investment portfolio in Renishaw and its share price was under £20. (It topped £50 last year). I'm sorry now that I didn't have even more in it at the time, even though it would have meant exposing myself to even greater "risk". Over short periods, I have performed abysmally compared to the market. I don't give a fig how my performance compares to the market. All I want is to earn a good return (say inflation plus 5% a year) in the long-term. I'm happy that I'll achieve that goal.

I do believe that Colm has beaten the market

If I have, I don't think it's because of any great skill on my part. I've stuck to a few very simple rules. One is to try to keep costs to a minimum. That's one reason for having a concentrated portfolio and for making relatively few trades. (I haven't checked, but I'd say that the turnover of my portfolio is much lower than average). DIY also helps keep costs down. I'm saved the costs of professional management, which I believe adds nothing to returns, on average. (Some professionals beat the market over long periods, but it's almost impossible to know in advance who they'll be). I'm also a firm believer in the adage that "it's time in the market, not timing the market, that counts". I have practically 100% in equities. I expect to get 3% to 5% a year more (on average) from them than from bonds. Therefore, I can expect to earn 1.2% to 2.0% a year more (on average) than someone who is 60% in equities. It's simple arithmetic and has nothing to do with being a good stock-picker. Also, I believe that keeping a diary of why I'm buying or selling particular companies helps to reduce the incidence of complete turkeys. It doesn't eliminate them entirely: witness Ryanair, which was one of my top five holdings in May 2016 and is still up there, sadly.
Strangely enough, having a concentrated portfolio helps me to sleep at night. As I noted in my "Diary" at the end of December, my portfolio was on the ropes. I lost around 30% in 2018. Yet I wasn't particularly worried at year end, as I was confident that some of my bigger holdings (Phoenix Group in particular) were at ridiculously low prices and would recover, if I could avoid having to sell while they were so grossly undervalued. That belief gave me a lot of comfort. I don't think I would have had the same equanimity if I had been invested in a faceless fund, where I wasn't familiar with the underlying investments.

 

[joe sod]

Do you advocate that it is a waste of time to be a DIY investor, and that the best course is to invest indirectly through
products such as ETF's, UT's, IT's etc?

No Im not suggesting that, clearly you (and Colm Fagan) know what you are doing. Its just that there seems to be an implied assumption that if any investor researches a company enough that he will make the correct investment decision, his research and assumptions could just be wrong. For what its worth its probably the case that most shares are not correctly valued and their values are dependant more on trends, fashions, emotions, trading algorithms than on their fundamental value. Look at what happened Neil woodfords funds, he knows more about investing and valuing stocks than any amateur investor.