New Sunday Times Feature - Diary of a Private Investor

Colm Fagan said:
Last year, I added Samsonite, the luggage company, as a core holding.
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Good to hear from you again Colm.

As an aside, Samsonite played an important role in investing history - their pension fund was the first institutional investor to employ a passive, index-tracking strategy back in the early 1970s.
 
As I guessed, AAM contributors came up trumps. Lots of comments and questions. Thank you.

I'll try to take the comments in order. I won't be able to answer everything now, but I will address them at some stage.

Brendan, I agree with you in theory that I have far too high a proportion of my portfolio invested in Renishaw, but this particular share has been part of my life for 20 years now and it is more than an investment for me. I attend regular investor days and AGM's and I now know the company and its people very well (although, as a non-engineer, the technology of the business is still a complete mystery to me). It's a bit like, when I owned my own business, or a high proportion of it, I didn't think it was wrong to have so much of my net worth tied up in one company. Also, I feel I owe something to Renishaw at this stage, given that the shares are worth 10 times what I paid for my first tranche so many years ago. I won't worry if I have to give back some of what I've earned.

Besides, whilst I recognise that the share price is now quite elevated (although less elevated than it was a few weeks ago), the risks of a significant fall are low, I reckon. The company has no borrowings, lots of cash and properties on its balance sheet and a shed full of patents that are given a zero value in the published balance sheet.

I'll respond to the other comments from you and others later.
 
Brendan Burgess said:
I get attacked for suggestion that a portfolio of 10 blue chip shares is enough.
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Brendan and I are on the same page on this. The subeditor in the Sunday Times titled one of my articles "Diversification is a false God, believe me". I almost got into trouble with the actuarial profession for committing a sin of investment heresy with that headline (which I didn't write), but I stand firmly by my belief that less than a dozen shares is sufficient, provided they are sufficiently diversified. I do agree though that 25% in one share is more than a bit rich. I've already dealt with that criticism above.

Brendan Burgess said:
Is there a survivorship bias here?
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There isn't a survivorship bias, in the sense that Renishaw, Apple and Phoenix were the only companies mentioned in my Sunday Times column that I said I would hold on to. I didn't pick and choose which ones to give an update on. You're right though that I would probably have been reluctant to give an update if some or all of them had turned out to be turkeys. If that had been the case, I'm sure others (not you of course - you’re too much of a gentleman!) would have reminded me and the world about it.

Brendan Burgess said:
Colm - I am sure you have picked duds in the past?
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Of course I have, one of them very recently. I'm still trying to work out what to do with it. Dealing with investments that have turned sour always poses challenges. Do you sell or hold on, in the hope of them coming good? I plan to devote an entire article to the question at some future date. Unfortunately, you’ll have to wait until then to hear about my disasters.

mtk said:
How do you borrow in HK$ and Sterling ? what are the basic mechanics?
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Very simple. What I call borrowing in currency X to invest in a share denominated in currency X, other people call a spread bet. Think about it. If you're still puzzled, come back to me.

Finally, Sarenco, I didn't know of Samsonite's claim to fame in the pensions world. Thanks for educating me. I like Brendan's aside
 

I still don't agree with you. In fact, I would say that you are too involved to make a clear decision on this.

You can still attend all the investor days and AGMs while holding 10% of your portfolio in Renishaw.

As I am a shareholder in Renishaw myself, I don't want to ever have to say "I told you so."

Colm Fagan said:
It's a bit like, when I owned my own business, or a high proportion of it, I didn't think it was wrong to have so much of my net worth tied up in one company.
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It's not really like that at all. When you own your own business, it's not really that easy to sell off part of it. You don't want anyone else to own part of it anyway.



Brendan
 
Hi Colm,

I disagree with your approach. What if (for example) it’s discovered that Renishaw’s Finance Director has been up to no good on the accounting side of things and the stock tanks? Or something analagous to the Volkswagen emissions scandal rears its ugly head? History is littered with examples of good companies brought to their knees by something that comes straight out of leftfield. Academic research suggests holding a minimum of 30 companies for that reason; I believe that your approach is flawed, but I admire the fact that you are willing to have a view and articulate that view without the veil of anonymity.

Gordon
 
Hi Gordon,


I don't want us to get too hung up on a particular company. I accept that I have too many shares in Renishaw, probably about 10% of my portfolio too many. No argument on that. Because it has done so well for me in the past, I'm prepared to cut it some slack. I won't lose too much sleep if the value falls significantly. Of course I don't expect the value to fall. The founder owns or controls over 50% of the shares. He knows the company, its business and its finances backwards. There is no way that the Finance Director could pull the wool over his eyes, or that he would leave the company open to the risks of a Volkswagen like emissions scandal. This is partly the point I was trying to get at in my response to Brendan about it being like me owning my own company. I trust the chairman/MD to look after my interests as well as his own.

On the more general point about needing to own shares in a minimum of 30 companies, I completely disagree. My understanding of the academic research is that this is the number of shares one should own to be able to broadly match the performance of the overall market. But I have no desire whatsoever to match the performance of the market. I don't care if the performance of my portfolio is significantly better than, or worse than, the broader market in the short term. I'm only concerned about the long-term. I'm confident that, over any five-year period, a well-chosen portfolio of a relatively small number of stocks - a dozen or less - will do better than the market.
 
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Colm Fagan said:
I'm confident that, over any five-year period, a well-chosen portfolio of a relatively small number of stocks - a dozen or less - will do better than the market.
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The problem, of course, is that you will only know with absolute certainty that your portfolio was well-chosen with the benefit of hindsight.

When you consider that only 25% of stocks have been responsible for virtually all stock market gains, you start to see the challenge of any stock picking strategy.
 
Brendan Burgess said:
I get attacked for suggestion that a portfolio of 10 blue chip shares is enough. Some of the others here must be getting heart attacks when they see you with 25% of your portfolio in one share.
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Except that these are not blue chip stocks, in reality at least two are small caps or possibly micro caps and holding large blocks of such stocks in a portfolio makes it a high risk exercise. In the abstract it does not look too bad, but it is worth keeping in mind that small caps tend to do best coming out of a recession and that the fall in sterling tend to push sterling companies upwards. And you would want to get a considerably higher return on such a portfolio to make the risk worth while.

If you actually take the time to dig into some of the blue chips you'll find that many offered a much better return at a lower risk - many of the five year price ranges would have offered up grains of between 100% - 200%. So you would probably have done at least as well if not better by concentrating in blue chips.
 
Hi Colm ,

I remember buying the paper to read your article it was well written , I didn't buy any more additions because I don't believe anyone can beat the market long term , maybe Warren Buffet but been Warren Buffet gives him a huge advantage.

To me your article could be called "Diary of a guy buying random stocks he likes" I mean its impossible to know IMO if there is any skill involved its too small a sample size and we may never have enough sample size to ever know.

Lets take Renishaw , its pure luck this company has done well for you is my reaction and there is no skill here but it can't ever be proved I think you bought it at a fair value , it's easy to convince yourself your making good plays but there is too much information out there and there is always people with more information than you have.

Colm Fagan said:
The founder owns or controls over 50% of the shares. He knows the company, its business and its finances backwards.
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What I'd say to that comment if he didn't know the share price was going to go from 18-52£ then hes unlikely to know the future direction of the share price , well maybe he did know it was going to go to 52£ maybe he should of bought more then , who knows for me your diary is about a guy picking random stocks and posting random results , before I opened my trading account I opened a demo account and picked random stocks just to practice the buying and selling process I logged on recently as to show someone how nice the platform was to use and the stocks in the demo account where still there and everyone was up nearly 300-400% I had no clue what I was picking I could fool myself and think I did but I didn't.

The average person is better off buying a balanced portfolio of shares that tracks the stock market , I would expect a higher return for holding a smaller portfolio but also you are more likely to have a higher loss in a falling market.

It's a well written piece but what is the average investor supposed to learn from it , I'm unsure if your recommending samsonite or not , I won't be buying it anyway I'd rather buy into foreign and colonial investment trust and own a small part in 1000's of companies. But all the best with it.
 
Sarenco said:
When you consider that only 25% of stocks have been responsible for virtually all stock market gains, you start to see the challenge of any stock picking strategy.
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Quite frankly, I'm sceptical about that statistic. Over what time period are "all stock market gains" measured? 12 months, I reckon, which is irrelevant from the perspective of a long-term investor. Does it make any allowance for reinvested dividends, which are a vital component of a long-term investor's armoury? Again, I suspect that the answer is no, which once again makes the statistic meaningless, bearing in mind that the average dividend yield is around 4% per annum. Can you tell me the source so that I can try to get answers to the questions I raised?


Like Gordon Gekko’s 30 companies, this is another of what I classify as financial urban myths - statistics that have an academic veneer but which mean absolutely nothing when examined in detail - that are cooked up by professional investment managers to frighten the ordinary Joe Soap off the stock market.
 
Hi Colm,

Again, fair play to you for engaging with people publicly without the blanket of anonymity.

However, I cannot accept your arguments. You are an actuary as I understand it, a respected profession for sure; I have no doubt that you’re an extremely intelligent guy. Nonetheless, how can you, essentially a fella in his attic, hope to outperform professional fund managers with all their resources? I have a friend who was a stellar stock picker with a global investment bank (as in $10m+ bonus per year). He left and set up in his own concentrated strategy with a small (circa 10) team around him. That’s a team of CFAs, accountants, quants guys, etc. And even then, there are plenty of people who would lampoon my friend’s efforts to generate alpha and outperform the market. How can “one man and his dog”, albeit an actuary, possibly hope to do well over the long-term?

Gordon
 
Jim2007 said:
at least two are small caps or possibly micro caps and holding large blocks of such stocks in a portfolio makes it a high risk exercise.
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Why not go the whole hog and say that all three, including Apple, are small or micro caps! No more need be said about Apple. The other two are firmly in the top 350 shares in the UK All-Share index, a long way from being small cap or micro cap!
 
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Fella said:
What I'd say to that comment if he didn't know the share price was going to go from 18-52£ then hes unlikely to know the future direction of the share price , well maybe he did know it was going to go to 52£ maybe he should of bought more then
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I don't know what to make of this comment. Of course the chairman/ majority shareholder didn't know the share price was going from £18 to £52. What he knew was that, as the top person in the business, it was his job to run it to the best of his ability. If he did the job well, the share price would increase and the value of his shareholding with it.
 
Gordon Gekko said:
Nonetheless, how can you, essentially a fella in his attic, hope to outperform professional fund managers with all their resources?
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Gordon, thank you for your kind comments. I didn't say that I hoped to outperform professional fund managers with all their resources. What I am saying is that, over the long term, I believe that I can do broadly as well as them after they have taken their pound of flesh to pay for their high salaries and bonuses, not to mention earning a healthy profit margin for the institutions that employ them. As an ordinary investor, I have two advantages over the professionals, neither of which can be sneezed at. Firstly, I have a genuine long-term perspective. No matter how vociferously the CFA’s, quants, accountants, etc. protest that they are taking a long-term view, their main priority is still their bonus at the end of the year. That is their primary focus, not the long-term performance of the investments they are managing. That misalignment of interests can damage long-term investment performance. Secondly, I have the experience of a lifetime in business. Like many people in my situation, I believe that I can recognise a bluffer at twenty paces - and there are a surprisingly high number of them at the highest echelons of business. One of my primary assessment tools for deciding whether or not to invest in a company is the language/ style/ clarity of the chairman's and chief executive’s statements that accompany the annual and half yearly reports, not the fancy measures used by CFA’s and quants. Of course, I study the numbers but more important to me are the strength of the belief of the top people in the strategy of the company, their confidence and ability to see it through, and the values they are inculcating in their employees. I believe that I can get reasonable answers to those questions from studying the bosses' comments accompanying yearly and half-yearly reports. Quants can't measure those "soft" factors.
 
Thank you for the update Colm, I read and enjoyed your articles in the Sunday Times and was disappointed when they were discontinued.

Apart from the update that has sparked this discussion have you any plans or desire to publish on a more regular basis as I'm sure many of us would enjoy the content, given the debate your update has generated on a snowy weekend.

I mulled over Renishaw when you mentioned it and I regret not purchasing some, opting instead for such safe havens as UK utilities and energy companies, that has proven to be poor judgement on my part but hey its only money and I am learning all the while.
 
Gordon,

Your comment about the guy in the attic deserves a more comprehensive response, as it goes to the heart of my philosophy.

Let's play a little mind game. Suppose the investment world is inhabited completely by experts with their CFA's, quants - and actuaries, Brendan. No one else inhabits this particular world. Now suppose expert A, with their team of quants, CFA's and actuaries, decide that they want to sell company X from their portfolio. They need to find someone to buy it, and at a price that is acceptable to them. Now we also have expert B, who also has their team of experts. They decide that they want to buy company X and add it to their portfolio. Again, they have to find someone who is prepared to sell it, and at a price acceptable to them. Thus, the teams from expert A and expert B get together (virtually of course) and agree a price P at which they complete the transaction. Everyone is happy that their experts have done a great job.

Now enter the poor guy from the attic. He just wants to buy shares in company X. He completes the transaction at the prevailing market price, which happens to be P. Thus, he gets the benefits of the accumulated expert wisdom of the teams from expert A and expert B, without paying a penny.

This is of course what the passive funds are doing, but the guy in the attic has an advantage over the passive funds. Every time there is a shift in the market, be it a rights issue, a share buyback, an IPO, et cetera, the passive fund has to buy and sell a small number of shares in every security it holds and incurs costs in so doing (incidentally, the advent of Mifid 2 has highlighted the extent of those costs, to the annoyance of Vanguard, et cetera). Meanwhile, the poor guy in the attic trundles along with his buy and hold strategy, completely oblivious to all that is happening around him and all the expert wisdom that's being bandied around. After five years, who do you think is going to be better off?
 
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VoiceofReason said:
have you any plans or desire to publish on a more regular basis
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Hi VOR
Yes, I plan to publish the occasional update on LinkedIn. I plan also to add them to this forum, as the quality of contribution from AAM is top class. The updates help me get my own thinking in order and ultimately help my decision-making.
 
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