Magic Hat portfolio turns 3

My Stockopedia “Magic Hat” Fantasy Fund
(http://www.stockopedia.com/fantasy-funds/magic-hat-463/) recently turned 3 years old. It returned 41.6% over 3 years, compared with 15.1% for the FTSE 350. That’s pretty good, although not spectacular, as it represents an annual outperformance of only 7.2%. I think many naive value-based strategies could have performed just as well. Undoubtedly many investors have done much better than this. I know it is the case for my own, personal, portfolio.

For nearly the whole of the portfolio’s existence I had been following a defensive strategy, and it had actually performed quite well, at what appears to be significantly less volatility than the overall market, although I have no statistical measure of it. If you look at the graphs of performance, it certainly looks less volatile, and is consistent with the view that I have selected defensive shares.

There were no “slam dunk” shares in the portfolio, i.e. shares that rocketed beyond all expectations. It seemed that, on the whole, they all made useful contributions to varying degrees. RTN (Restaurant Group) looks like it was best performer, and I think makes it fairly clear in my mind that buying good quality with good growth prospects (although I would not necessarily characterise them as “growth” stocks) at reasonable valuations is likely to provide a satisfactory return. Not necessarily a stellar, or even market-beating return, but at least satisfactory. I note that RB (Reckitt Benckiser) is up nearly 50% since it was bought for the fund, which is pretty good for such a large, slow-moving company.

My biggest mistake was pawnbroker ABM (Albermarle & Bond) – a company which I perceived to be of good quality – but which later shown to be very bad indeed. Fortunately, I bailed out after I realised my mistake, even though it meant taking a substantial loss. Selling a share like that is not easy, because it’s easy to figure that the reduction in share price “compensates” you for the new information. Sometimes it does. Sometimes it doesn’t. You can’t expect to get your buys and sells right all the time. I expect that I will always make some mistakes. It’s just not possible to call them right all the time. My general experience with selling is that, with hindsight, I’m glad I bailed out on my mistakes. I think it’s a good general rule. If you buy a share with one set of expectations, and it later becomes clear they were wrong, then you will do best to sell. In the words of David Einhorn: “When we realise we have made a mistake, we sell. Period”.

I’m actually pretty good at selling my mistakes. My worst selling tends to be because I lose patience. Maybe that’s something I need to take on board mentally.

Since 2014, I have gradually being transitioning the Fund to a Greenblatt Magic Formula type fund. My expectation is that I should be able to improve over my Fund’s previous performance, as Stockopedia’s Greenblatt screen does throw up some very interesting candidates worthy of investigation. In my mind, there certainly seems to be the opportunity to beat a stodgy defensive strategy. It will be interesting to see if a human can beat a robot when it comes to company selection.

Will I pick up too many false positives, too few true positives, and contrariwise for the negatives? We shall see.

Some of the Chinese Greenblatt stocks have had some good spurts lately – although overall they have been pretty dire. I’m adamant in my view it’s best to about Chinese stocks, though, irrespective of short performance bursts. Other companies that I will tend to avoid will be the more “boring” companies. Companies like REL (Reed Elsevier). It is on an earnings yield of 10.5%, which is OK, but doesn’t grab my
attention. It’s also something of a plodder. I would rather take on more risk in the hope of a much larger return.

So, that’s my thoughts on my Magic Hat portfolio.

Happy and prosperous investing to you all.

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About mcturra2000

Computer programmer living in Scotland.
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